If you’re thinking about which stocks to sell heading into 2023, you might want to start with companies whose CEOs are overpaid.
The Financial Times published an article in mid-December discussing how to pay executives in the age of stakeholder capitalism. It pointed out that Amazon (NASDAQ:AMZN) CEO Andy Jassy earned nearly $213 million, 6,474 times the median employee pay at the e-commerce juggernaut.
Here’s a remarkable statistic: CEO pay in the U.S. between 1978 and 2021 grew by 1,460%, adjusted for inflation. Over the same period, the average worker’s compensation grew by 18.1%. CEOs’ pay grew 80x faster — no wonder the average Joe is having trouble keeping up with inflation.
If you own stock in companies whose CEOs and named executive officers consistently make the highest-paid lists, you might want to reconsider owning them because, much like the blindfolded monkey throwing darts at a newspaper’s stock page, a CEO’s contribution to the bottom line is overblown.
“Every firm wants to believe its CEO is above average and therefore needs to be correspondingly remunerated. But, in fact, CEO compensation could be reduced across the board and the economy would not suffer any loss of output,” states pg. 17 of the Economic Policy Institute’s Oct. 4 paper on CEO pay.
I’ll select these stocks to sell from companies whose CEO’s made As You Sow’s 2022 list of the 100 Most Overpaid CEOs.
To narrow the field, these are companies whose stocks are down more than 15% in 2022, and their CEO’s pay was 399x their median employee or greater, the average of CEOs heading up the 350 largest U.S. companies by revenue.
|WBD||Warner Bros. Discovery||$9.03|
Warner Bros. Discovery (WBD)
Next on this list of stocks to sell is a well known media conglomerate. Warner Bros. Discovery (NASDAQ:WBD) is down more than 57% year-to-date through Dec. 16.
CEO David Zazlav was paid $37.7 million in 2020, 565x the median worker pay of $66,689. If that doesn’t make you sick to your stomach, the fact that Zaslav made $246.6 million in 2021, 2,972x the median worker’s pay of $82,964, should.
And, while I realize Zaslav has to pull a rabbit out of his hat to realize the $202 million in options awards from his 2021 compensation, that doesn’t make it right just the same.
Zaslav became Discovery’s CEO in November 2006.
The company went public in September 2008 after Discovery Holding Co. — controlled by Liberty Media founder John Malone — and Advance/Newhouse Programming agreed to roll their stakes into newly formed Discovery Communications.
Trying to calculate Discovery shareholders’ returns from its IPO in September 2008 through today isn’t easy, but I’ll do my best.
Discovery’s Series C shares had a high of $16.87 and a low of $14.16 between Sept. 18, 2008 (IPO) and Sept. 30, 2008, for an average of $15.52. The company did a 2-for-1 split in August 2014. In the fourth quarter of 2014, a Series C share was worth an average of $34.22. At the end of December 2021, a Series C share was worth $22.90.
Based on a cost of $15.52 and a market value of $45.80 ($22.90 x 2 shares), the compound annual growth rate (CAGR) for Discovery stock between September 2008 and December 2021 was 8.7%. By comparison, the return for the S&P 500 over the same period was 10.8%, 200 basis points higher.
Fast forward to today.
Warner Bros. Discovery stock started trading in April. Shareholders got one share of WBD for every share held in Discovery. Based on a $9.91 closing price as of Dec. 16, David Zaslav has produced a CAGR of 1.8% during his tenure.
I don’t know the bigger noose around the company’s neck: David Zaslav’s excessive compensation or Warner Bros. Discovery’s $48.6 billion in long-term debt?
Warren Buffett has stuck by this operator of dialysis centers despite the fact DaVita (NYSE:DVA) has lost more than 36% in 2022 and made less than 1% over the past five years.
Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) first bought 2.7 million shares of DaVita stock in 2011. By the end of 2013, it was up to 36.46 million. Today, Berkshire holds 36.10 million shares valued at $2.61 billion. According to WhaleWisdom.com, Berkshire paid an average price over the years of $48.85. Based on the current share price, he’s still up approximately 48% on Berkshire’s 11-year investment.
However, if Buffett had taken his advice and bought the SPDR S&P 500 Exchange-Traded Fund Trust (NYSEARCA:SPY), Berkshire would be up 205% over the same period.
Javier Rodriguez has been DaVita’s CEO since June 2019. Before taking the top job, Rodriguez was the CEO of DaVita Kidney Care. He’s been with DaVita since 1998.
The stock is up since taking the job; he took over at its five-year low. However, it is down significantly from its Aug. 2021 all-time high of $136.48.
Why should investors consider this a contender for stocks to sell?
The CEO’s total compensation for 2019 and 2020 was $90.2 million, with $68.5 million in 2020 option awards. In 2020, that was 1,137x the median worker’s pay of $64,620. The company tried to candy-coat the pay, suggesting it was $18.7 million, or a reasonable 289x worker pay.
At the end of October, DaVita reported Q3 2022 results that were drastically lower than analyst estimates. On the bottom line, it earned $1.13 a share, 64 cents shy of the consensus. Consequently, it now expects to earn $6.45 a share in 2022 at the midpoint of its guidance, down from its previous estimate of $8.00 a share.
It’s one thing to pay a CEO gobs of money when they’re producing; it’s another when they’re missing the mark by a country mile.
In summary, Buffett can afford to be patient with his bets. You can’t. Find a better healthcare investment sooner rather than later.
Paycom Software (PAYC)
This last one in my stocks to sell list is a tough call to make.
In October 2018, I included Paycom Software (NYSE:PAYC) in a list of seven tech stocks to buy for the future of human resources. Chiefly, the fact that Fortune ranked it fifth in its 2018 list of 100 fastest-growing companies was hard to resist.
However, CEO and founder Chad Richison’s 2020 compensation is just too hard to ignore. Richison earned $211.1 million in total compensation in 2020, virtually all of it via stock and unit awards.
Richison has been CEO since he founded the company in 1998. His net worth in 2021 was estimated to be $2.9 billion. Estimates put the future potential gains from his 2020 restricted shares at more than $2 billion.
Not many founders seem to follow the Warren Buffett compensation plan — $100,000 annual salary and no options or stock grants — but Richison’s pay package in 2020 was approximately 12x the average S&P 500 CEO in 2021.
Richison took the company public in April 2014 at $15 a share. Its stock is up nearly 2,000% in the eight-and-a-half years since. There’s no question that shareholders who bought IPO shares and still hold them are more than happy with their returns.
The evidence suggests that given the industry and timing, many other CEOs could have delivered the same results at a much lower compensation. There’s fair pay, and then there’s obscene pay. Richison’s is the latter.
Forbes wrote an article in January 2020 highlighting what a great job he’d done growing the business. Subsequently, since that article, PAYC stock is up 9% over nearly 36 months. Down 23% in 2022, Richison has hardly earned his keep in recent times.
It appears the easy money has already been made for Paycom shareholders, especially its CEO. The opportunity cost of waiting for Paycom to catch fire again is not worth it.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.