Overpaid CEOs Are Hurting Shareholders
A major global bank made news the other day.
The notable part of this news story, though, is what the bank DIDN’T do.
You see, near the end of September, Spain’s Banco Santander appointed a new CEO. It named Andrea Orcel, the then-head of investment banking at Swiss firm UBS.
Though the move was a surprise, it wasn’t wholly out of left field. You see, Orcel had previously advised Santander’s late chairman, Emilio Botin. Botin’s daughter, Ana, fills that role today.
Orcel told his UBS staff: “I wouldn’t have left for anything less than a client that I have been advising and working with my whole career.”
Alas, he isn’t going anywhere. The bank said he’s no longer welcome.
More on that and what it might mean below…
Banco Santander Made the Right Move
The venerable Spanish bank got cold feet.
And I believe it made the right move.
The bank said the compensation Orcel required was more than it was willing to pay.
He had deferred pay at the Swiss investment bank that he couldn’t take with him … so he expected Santander to pay.
But Santander said it wouldn’t.
When is the last time you heard that happen?
Don’t get me wrong. Executives — and regular employees, too — pass up job offers as inadequate all the time.
But it’s rare that we hear about it with C-suites.
And — to be certain — these arrangements rarely get kiboshed four months after a firm announces the hire.
So, while this may be embarrassing for Banco Santander, it’s good for public companies overall … and especially for their shareholders.
How Could Jerking a High-Profile Investment Banker Around Be Good for Shareholders?
In our society, people do lots of things simply because everyone else is.
When you made a wrong decision as a kid, your mom used to ask you if you would jump off a cliff just because someone else did.
You sheepishly replied: “No, Mom.”
However, adults operate like lemmings all the time … especially when it benefits us.
The nonpartisan Economic Policy Institute says CEOs today earn 270 times as much as the average worker at their firm. They earned only 20 times as much in 1965.
Why has the disparity grown so much?
Basically … because we let it. You see, CEOs — and their consultants — determine their own pay.
Let me explain…
How CEOs Determine Their Own Pay
Fifty years ago, firms compared CEO pay to other employees in the company.
At some point along the way, the new business of executive-compensation consulting changed that.
Consultants recommended switching from “internal equity” to “external equity.” They said it was more appropriate for CEOs to compare their pay to their peers — e.g., other CEOs.
So, companies would now pay CEO No. 1 in-line with the average compensation of CEOs No. 2 through No. 6.
The natural progression got us to where we are today.
If CEO No. 4’s pay is 25% below his peers, the new method explained why he needed a raise.
After all, we don’t want our CEO to leave the company, do we?
Once CEO No. 4’s pay increases, so does the six-firm average.
And so on…
The next thing you know, CEO pay compared to his average employee increased 1,250% — from 20 times to 270 times — over a half century.
Why Am I Telling You This?
This isn’t a political rant. Democratic and Republican CEOs happily participated equally in the fleecing of their respective workforces over the years.
But “fleecing” may be too harsh. After all, who turns down more money?
What I’m telling you is: Smart management teams and boards of directors should consider their opportunity here.
Sure, no one wants to make less money. I get it.
And boards have long shown that they can approve almost any pay package.
But Banco Santander has shown things can change.
Does that mean things will change, though?
Will CEOs voluntarily give up compensation?
Will boards have the backbone to tell CEOs they can’t earn 270 times the compensation of the company’s average employee?
I don’t know.
People aren’t perfect. Like politicians, they have difficulty making tough decisions … even if they know they’re the correct ones.
I submit this to you, though. In my humble opinion, the companies that voluntarily try to bring management’s pay more in-line with that of the regular Joe will achieve a few things:
- They will be more appreciated by — and will sell more stuff to — millennials and other groups who seek fairness.
- Their employees will recognize and applaud management leading by its actions.
- Their compensation expenses will fall.
- Their share prices will rise.
Take a look at Banco Santander. Since it announced Orcel’s hoped-for pay package was too lucrative on January 15, its share price rose 2% in four days.
Now, the two may not be related. Santander’s shares had already been rising since December 24 … along with lots of other stocks.
But don’t underestimate the power of common sense.
If your bank told you it was going to treat you better in the future, you would likely view it as a positive. That is really what Banco Santander has told its investors it’s going to do.
It won’t be hostage to people who cannot prove they deserve to earn 270 times as much as the employees they manage.
Now … who else do you think will step up to the challenge?
We’ll revisit this story in the future to let you know.
Editor, Insider Profit Trader
P.S. We are looking for companies who treat their shareholders right … with their actions.
If you run or work for a company who has addressed this challenge head-on, please let us know.
And we realize there are other ways to do this in addition to right-sizing compensation. Please share your experiences with us at SovereignInvestor@banyanhill.com.
If you don’t want us to name you, we won’t. But we know Banco Santander isn’t the only firm out there that is trying to do right by its employees.