A highly-paid CEO isn’t a good investment
By Antonia Oprita, Marketmoving.info
Shareholders in UK and US companies would do well to reflect over the definition of investment: money that you put into a company now in the hope of getting bigger returns down the line.
The trouble is that, while the meaning of the word “investment” is clear, the meaning of “down the line” is not. How long are you willing to wait, and how big a return do you want? Also, if you don’t get the return – or you reckon you’ll stop getting it soon – it’s time to get out of the bad investment and try a different one, right?
However, this latest piece in The Observer by Will Hutton can be read as an ominous warning: Investors are at risk of soon running out of good companies to put their money into.
That’s because executive compensation has stopped reflecting performance. It has turned into a race to the top, with bonuses and salaries – at least for companies in the UK and US, which are the most likely to be listed – spiralling upwards just because inter-connected CEOs find clever ways to push share prices higher over the short term.
It isn’t the first such warning. Famous economist Andrew Smithers argues in his latest book “The Road to Recovery“ that the culture of high bonuses endangers the global economy. CEOs incentivised to cut costs no matter what in order to maximise shareholder returns (and boost the price of the shares they themselves own in the company) think for the short term only.
But for the world economy to prosper, we need CEOs that have the vision and drive to think long term. To invest, to create new ways of doing things, to take risks, to hire people. The editor in chief of MoneyWeek, Merryn Somerset Webb, argues on her blog that if companies were to offer less guidance to the markets, we’d all (including the CEOs) be able to get on with pulling the economy off the ground.
For the moment, the monetary policy masters of the world have managed to slow down the crash – but at the price of rising inflation, even if it’s just in asset prices for the moment.
Sure, CEOs can keep telling themselves that they are worth the huge sums they receive. Some may even believe it. But the truth is, most of them are not. And the sooner shareholders realise this, the better.