General Electric Co. (GE), whose performance, both from a profit and stock price standpoint, has been dismal over the past decade, announced that its new boss could receive $21.3 million in annual compensation and earn shares worth more than $200 million — but only if he manages to reverse the company’s deep stock slump. As part of his pay package, the new CEO – Mr. Culp would collect as many as 7.5 million shares if GE’s share price closes on average at least 150 percent above its current level for 30 consecutive trading days before Sept. 30, 2022. Just the news of his appointment had GE stock surging, netting Mr. Culp $95 million as of Friday this week, and his bonus would soar to as much as $237 million if the performance condition is met.
Compensation in all its excesses for top corporate executives is a perennial topic of astonishment and outrage. Most CEOs and CFOs get outsized pay packages and stock options compared to the line workers. And that has become the norm. But, their packages were usually tied to company earnings and profit goals. Until now. By tying Mr. Culp’s package to a specific stock price target, the GE board has ensured that Mr. Culp would do whatever it takes to move the stock price with little regard for the long term growth and resurrection of GE as a major player that it once was. But GE is not alone. Chipotle announced earlier that a portion of future CEO compensation will be tied to the company’s share price performance. Oracle followed suit stating that its CEO must get Oracle’s stock to an average price of $80 per share for at least 30-days to receive $100 million in stock awards.
Future Wealth’s View
Jack Bogle, the founder of Vanguard Group, said that “In Corporate America, we have an abundance of management, but not enough leadership”. It is clear that we are in desperate need of new types of leaders at the helms of our publicly listed companies. Leaders like Bob Iger at Disney, Jim Sinegal at Costco, Warren Buffett at Berkshire Hathaway and Jeff Bezos at Amazon.com are a few good leaders in the minority while, we are seeing a plethora of the Elon Musk of Tesla types, who care little about the company and in Musk’s case, care little about the company, its corporate governance and the SEC as well.
There is something fundamentally wrong in the CEOs getting paid not for how well their companies do, but for how well the stock market does. As investors are well aware, the factors that go into how well a company’s stock performs are often things beyond the control of even the most talented CEO. These include the state of the economy, industry trends, interest rates, stock-market cycles, inflation and the quality of the management team among others. In some ways, share price may be the worst way to judge an executive’s performance, yet that’s what the GE board settled on. And Mr. Culp ain’t complaining. The message is – being a talented executive is good, but being lucky one is even better.