Are CEOs and Shareholder interests aligned?

Trend: Extraordinary payouts to CEOs without equity appreciation are creating shareholder backlash.

Mark Cuban describes why some CEOs are not working for the shareholders.

Source: The Big Lie - CEOs and Shareholder interests are aligned - Blog Maverick

There seems to be “prevailing wisdom”, or we could call it a school of thought, that if the CEO of a public company owns stock, that their interests are aligned with shareholders.

The underlying logic  is that all shareholders want the price of the stock they own to go up. So if management owns stock, and they work to get the price up, then management and shareholders have achieved a meeting of the minds and everyone is happy. Right ? Wrong.

There is one primary disconnect that makes this completely untrue and at its heart,  the reason why executive pay has gotten so out of line and why individual shareholders are being taken advantage of every single day.

There are two types of CEOs, those who are the founders or co-founders of their companies, and those who were hired to do the job. The difference is important because those involved with the founding of their companies not only have a different personal connection with the company and its employees, but more importantly, since they founded the company, they most likely already own a lot of stock.  The motivation of a founding CEO will be money, but there will be other considerations. Sometimes.

Then there are those hired to be CEOs.  What are the goals of hired CEOs ?. Plain and simple, its to get paid. To make as big a chunk of money as they possibly can in the shortest amount of time. No one in their right mind is going to take on a job with the amount of pressure, stress and away from family time that comes with being the CEO of a public company without getting paid incredible sums of money.

There is an interesting kinship between hired CEOs and professional athletes. Both realize that there are limited opportunities to make the big financial score, and if they dont make it this time through, they may never get the opportunity again.

There isnt a CEO in America with the opportunity to take  the helm of a public corporation that didnt run the numbers in their head and play “what if”. What if the stock went to this price ? What if the stock went to that price?  Then based on the total number they needed to get to the networth they always dreamed of, and  using the CEO pay totals of men or women who had already  done the same  thing to get their current jobs as comps, they  negotiated their deal from there.  Any CEO in this position who tells you otherwise is lying.

Which is why the concept of CEO and shareholders interest being in alignment because they both own stock is a big lie.  The CEO wants to hit the homerun of their career when they take the job, the shareholder just doesnt want to strike out with their life savings.

via Barry Ritholtz at The Big Picture