It's highly probable that companies that are sparing with their bosses' pay would turn out to be better investments than those who are lavish. Think about it. I put this theory to the test via a recent report on US executive pay from Glass Lewis - a firm that carries out corporate governance analysis for institutional investors.
Entitled Pay Dirt, the report is a quality piece of work. It ranks the top 3,000 US quoted companies by an aggregation of several indicators of wealth creation over three years. Then it looks at the pay, including share awards, of each company's top five executives. A company that came 20th in its industry group in terms of wealth creation but second in terms of pay would certainly get on to Glass Lewis' Overpaid list. But a company that came top for wealth creation could pay its bosses spectacularly and yet still make the Underpaid list. To whit, Apple, where the top five executives received the third highest aggregate pay out of 3,000 companies - just under $150m (and that included the token dollar a year that Steve Jobs took for his last four years in office).
Pay Dirt gives the one year share price change for all the companies in its lists. This hints at the shareholder detriment from high pay: the Overpaid list averages an 18 per cent gain against 25 per cent for the Underpaid list. But one should never set a lot of store by one year's worth of data. What, I wondered, would 10-year data reveal? As I looked these up one by one, I confess I was a bit nervous. Would this fuel the No Free Lunch campaign against bloated executive pay? Or would it end up as a quiet cast-aside?
What a belting result! As you can see, over 10 years, companies on the Underpaid list generated an average share price return of more than 500 per cent, whereas the Overpaid list returned just 38 per cent. I should point out that the gap would have been bigger if I had not excluded Apple (plus 5,000 per cent) from the Underpaid list on the grounds that it is just a bit too miraculous. That still left a few head-scratchers. Believe it or not, Cliffs is an iron ore miner. Ten years ago, after two decades of adversity, it was bombed out. But it rode the steel boom of the past 10 years to fabulous effect. American Tower? It does mobile phone masts.
To shut off all possible criticism about fortuitous anomalies, I recalculated the Underpaid average after excluding all four top performers as well as Apple. They still won hands down, with an average 228 per cent compared with 38 per cent.
This finding can take you in many directions but the most obvious one is: Is this investible? Could you have identified the underpaid bosses of 2011 back in 2002? Or, put another way, do the underpaid bosses of 2012 promise extra rewards to shareholders 10 years ahead? I'll have a little look at that subject in a future column.
10-year share prices of S&P 500 companies with the most…
|OVERPAID bosses||UNDERPAID bosses|
|US Steel||30%||Union Pacific||275%|
|average excluding top 4 (Cliffs to Amz)||+228%|
|S&P 500||+22%||S&P 500||+22%|
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Alistair Blair writes the No Free Lunch column which you can read on his homepage. He is a past winner of the Business Writer of the Year Award, has worked in investment banking and fund management. E-mail: firstname.lastname@example.org