Apple Steve Cook Highest Executive in 2011?

Apparently, Tim Cook could be the highest paid person in 2011. The Associated Press is reporting that Tim Cook could stand to receive $378 million in compensation. It should be pointed out that $376 million of this is in the form of restricted stock. Companies give employees restricted stock in order to reward long term productivity from employees. The shares usually can’t be sold for a number of years. The earliest Mr. Cook can sell these shares is August 2016. Not only does he have to wait five years to sell these shares but he can only sell half of the shares receives at that time. He will be able to sell the other half in August 2021. In essence, the idea of restricted stock is to incentivize employees (usually executives) into creating shareholder wealth. If employees are highly productive and make decisions that create wealth for the company it will usually be reflected in the share price. I say usually only because in the short term the market can gyrate for various reasons but the long run is a good measure of a company’s true value. Profits are created by fixing problems.

People complained that executives were getting paid too much of a salary so then corporations began giving executives (and regular employees) options. Even to this day people complain when executives receive large amounts of compensation because of stock options. If you look at Tim Cook 99.4% of his compensation will be based on how well Apple stock does. True his options today are worth $376 million however if Apple takes an iTumble in the market Cook could stand to lose lots of money depending on the stock price in 2016. In 2016, when Cook has the right to buy the stock he will pay ordinary income of that money. Assuming he is in the highest tax bracket, tax laws don’t change, and Apple stock is around $500 per share cook would pay around $78 million in taxes when he has the right to exercise (buy the stock). Not only will Cook pay ordinary income but also pays capital gains when he ultimately sells the stock.

Executive compensation is a hot topic. Often people who have never paid or been a CEO seem to know how much a CEO is worth. What people seem to fail to realize is how much of net worth any executive has tied up in stock options. True the executives get a salary but often used to pay their taxes from exercising options. If anything these executives have much more to lose than the average employee so much of their net worth relies upon how well the company does.

Hopefully, Tim Cook will lead Apple to create insanely great products that satisfy millions of people. With Steve Jobs now gone we can now test to see how “innovative” Jobs really was. If Cook is successful the value of his stock options will rise. Of course he won’t be able to cash out his stock options until 2016.

What Makes A Successful CEO?

I have often wondered what type of characteristics a typical CEO might have. The typical person thinks of the CEO as some all around person, who is charismatic, attractive, and socially outgoing. I would say that some of these characteristics are what some CEOs have, however they are not necessarily the characteristics of CEOs. For instance managers who promote people could look around the company and see what type of characteristics people in upper management have and try to find those same skills in other people they are trying to promote. Also usually people with many advanced degrees are not the best CEOs. People might think, "Well this person has a PhD" so therefore they should know how to run a company. There are all different kinds of intelligence. I would say there are exceptions to this Lee Raymond of ExxonMobil and Jack Welch who both have PhDs in chemical engineering.

Luckily, Steven Kaplan of the University of Chicago has done some research on this topic and should have a forthcoming article published in the Journal of Finance. Kaplan did an interesting study based off 4 hours interview with people interviewing for CEO positions in private equity and venture capital firms. Kaplan’s main argument is not to hire someone because they have very good people skills. The better test of a CEO is their track record of getting things done. Moreover, Kaplan states that a CEOs talent, skills, and abilities are important characteristics in figuring out who to hire as a CEO. CEOs in general have to get the job done or they are fired. Building off Kaplan’s research on executive compensation CEOs today face a higher turnover rate than decades ago. The important thing for any organization is to make progress. This means constantly making things better and improving. People that create results generally are people that get the job done and progress not only themselves but the company as well. Three traits that Kaplan mentions that what board members should look at in their hiring decision is someone what is: persistent, efficient, and proactive.

I do think that most good CEOs are also effective communicators. These people tend to be articulate and are pretty good speakers. However, I don’t think this should determine whether or not a CEO gets hired. The most important thing is a CEO has to understand the business they are in and the possible risks and how to mitigate them. Any CEO can look like a genius when the market or their industry is doing very well. However, the true test of a CEO is managing a company when things are bad. Many companies take on too much debt, create products that people don’t buy, or invest in projects that will never see a dime. Good CEOs know how to try to mitigate risk. Also another characteristic I would say that is important for a CEO is delegation. CEOs of any Fortune 500 company get hundreds of emails a day. These people have to understand what is important and what isn’t. Good CEOs know who knows what, and how to use that for the company’s benefit. I really don’t think people understand what it takes to be a CEO.

I am always intrigued when they say this CEO makes X times the average worker. No one ever stops to think that usually the CEO is also X times more productive than the average worker. Not only that the average worker does not have the skills needed to become a CEO or else CEO compensation would decline dramatically. Also being a CEO is not a 9-5 job. I would be willing to bet that no CEO in the Fortune 500 works less than 40 per week. Anyone who simply thinks they can walk into a major company and take over and not create a catastrophe is mistaken

Corporate CEOs: Do They Make Too Much?

Once concept I have been thinking about for a while is executive compensation. The media and average person will say these people are paid outrageous sums of money even when their companies go down the drain. The only exception I actually agree with these people on was the financial bailout where CEOs were paid a lot even though their companies were bailed out by the government.


Beginning in the 1970’s companies began as part of executive pay to give certain employees stock options in order to align the same values between employees and managers. In 1992, the Securities and Exchange Commission (SEC) wanted publicly traded companies to offer more disclosure in terms of how executives were paid in order to allow shareholders more transparency. Companies before June 2005 did not have to expense stock options on their income statement. After June 2005 companies had to expense stock options or show them as a cost. Today options make up a large part of executive compensation. What is ironic however is that when CEOs were paid millions of dollars without stock options people complained because it was too much. When these people complained and said that CEOs should be paid based on how well the company does the CEOs started to make even more money and people complained even more. People seem to get upset with the amount of money other people make no matter how they are compensated.

Steven Kaplan at the University of Chicago has studied executive compensation and has some interesting data on executive compensation. Kaplan makes the important observation that when looking at CEO pay there are important things to look at. First, since such a large part of how much CEOs are paid is in stock options. Stock options are awarded to CEOs but they are not really worth anything until they are exercised. I really don’t believe people understand how executives are granted these options. Basically, executives who often have worked at the company are awarded them because they have performed well, created value, and often have been with the company more than a decade. All these are requirements just to get the stock options. On top of all this there is a time CEOs have to wait from the time the options are awarded to exercise them. Once employees are granted stock options they can’t sell them. A vesting period or waiting period is requires and this could be as little as 2 years or 10 years. Usually companies that are established have longer vesting periods since they want to reward long term behavior. So to complain and say that executives and CEOs are in it for the short term is nonsensical considering they have to wait long periods of time to cash out their stock options.

Kaplan’s research also shows that companies in the top ten percent of actual pay (not what the options were worth when granted but only after exercised) had stock returns that were 90% greater than companies within the same industry over the previous 5 years. However, companies in the bottom ten percentile in their industry saw their stock underperform 40% over the previous 5 years. So in essence what this means is that CEOs that don’t perform well will lose money since most of their compensation comes in the form of stock options. Turnover in these companies has also been increasing. In the 1970s, around 10% of Fortune 500 CEOs lost their jobs. In modern times, around 60% of Fortune 500 CEOs lose their jobs. One large reason CEOs are fired are because of poor performance. Another explanation for why CEOs are making lots of money is that the only way a company can make more profit is by expanding or adding more employees. CEOs will only add employees if they think value can be created. So as a firm grows in the number of employees CEOs are in charge of managing more resources. Research from Gabaix and Landier in 2008 showed that since the 1980s firms have increased in size by a factor of four to seven times which is the same increase in CEO pay. According to Kaplan’s data CEO pay from 2000-2007 was decreasing (I haven’t seen his data after 2007). CEOs these days are put under more scrutiny than ever before. After the 1992 rule by the SEC there was more shareholder activism and regulation regarding publicly traded companies. Sarbanes Oxley has also made CEOs basically sign their life away if there are any mistakes. It is interesting to see how many CEOs going into private equity and hedge funds as opposed the other way around.

CEOs are actually underpaid compared to people in private equity and hedge fund managers. In 2010, John Paulson earned $2.4 billion. In the same year Larry Ellison was paid $84.5 million. Or to put this in a perspective a union leader would understand a hedge fund manager is making 28 times the amount of a CEO! In fact the top twenty five hedge fund managers are paid more than the combined amount all of the CEOs in the S&P 500. Hedge fund and private equity firms don’t have to worry about the same kinds of regulation as public companies (maybe this is one of the reasons they make more).

So the case by be that CEOs are underpaid. CEOs work extraordinary hours, have to deal with burdensome regulations, have to take the blame if the company goes down the tubes. Shareholders can always vote CEOs out of their position. To think that CEOs just sit around and count their money and pick out wallpaper like I believe some people do is foolish. Firms have been expanding which explains some of why CEOs are now making more. Also the technological revolution of the 1980s and 1990s allowed CEOs to create more value. If people really believe CEOs are overpaid they should try to become a CEO so they can make oodles of money and drive down the price an average CEO can make.