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Show Me the Stocks, Not the Cash, Say Optimistic CEOs

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In early March, I made the case that there’s no greater vote of confidence in a company’s growth prospects than when its top officers put some skin in the game and buy their own company stock. Among the examples I used were Warren Buffett, who owns millions of shares in Berkshire Hathaway; Elon Musk, who purchased over $100 million worth of Tesla stock in 2013; and myself, the largest shareholder of U.S. Global Investors.

Another example of how bullish an executive is on his own company is when he chooses to forego a base salary entirely and instead be compensated in company stock.

The most recent chief executive officer to receive such compensation is American Airline’s Doug Parker.

In a letter to employees, Parker wrote:

Going forward, I have asked our Board to restructure my compensation such that I will no longer receive a base salary or an annual bonus. Instead, all of my primary compensation will be paid in AAL stock. This stock will have to be earned over time, and will also have to be earned by performance. I believe this is the right way for my compensation to be set—at risk, based entirely on the results achieved, and in the same currency that our shareholders receive.

Parker has such confidence in his own company and the industry in general that he’s willing to place a huge portion of his financial security in its hands. This, along with American’s recent addition to the S&P 500 Index, should make investors’ ears perk up.

He’s not the only CEO who’s switched to stock.

Fellow airline executive Maurice J. Gallagher Jr. of Allegiant Air has also passed on cash, receiving a little over half a million dollars in stock and options in 2013 alone.

The late, great Steve Jobs was famously paid $1 a year to serve as CEO of Apple—which we own in our All American Equity Fund (GTBFX) and Holmes Macro Trends Fund (MEGAX)—taking his real payment in company shares. In February 2011, a few months before his death, it was reported that Jobs owned about 5.5 million shares in Apple stock, which at the time was worth a little over $2 billion.

Another notable example is Larry Ellison, co-founder and former CEO of computer technology company Oracle, also held in GBTFX. In 2013, Ellison was the most highly compensated CEO out of the 300 who were featured in the Wall Street Journal/Hay group CEO Compensation Study. During his final full year of work at Oracle, he received $67.3 million—nearly all of it in stock options.

Stock has been steadily growing in importance as a form of compensation for the most successful CEOs. Between 2009 and 2013, performance stock for those leading S&P 1500 Index companies rose 52 percent, the largest increase of any other type of payment. Compared to all other methods, in fact, performance stock is now the most-preferred, according to executive compensation consultancy firm Equilar.

Stock isn’t just good for executives; it’s also good for shareholders.

In a 2010 study piece that appeared in the NYU Journal of Law & Business, Villanova University Business Law Professor Richard A. Booth writes that “stock options are indeed the best form of incentive compensation yet devised” for CEOs. His reasoning: “[I]t is the supposed duty of the directors and officers to maximize stockholder value. In practice, there are few situations in which that duty is enforced as a matter of law. Options fill the gap.”

Although options are a specific type of security, giving the holder the right to buy or sell shares at a later date, they’re used here as a proxy for the broader argument that stock helps executives better align their interests with shareholders’.

 

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