Jan 072011
 

I still can’t get my mind wrapped around this.

This article lists the top 20 CEOs by compensation during the year 2009. In many cases, most of their compensation comes from stock and options rather than base salary. Several of the companies that are run by this elite group actually lost money during the same year. In other words, they were rewarded beyond their base salary, even though their companies were not profitable.

Why does this happen? In some cases, the answer is very simple. The stock value of the companies actually increased while the company was losing money, and the “bonus” resulted from the CEOs in question cashing in on their stock options. On paper, I suppose, we could say that the CEO is being rewarded for increasing the stock value, i.e., the perception that the company will make money in the future, even though there were no immediate results.

This is really weird to me, but I think it is a sign of the times.

In theory, corporations ought to work just like mom and pop businesses. When mom and pop open up a corner restaurant, they invest money into their business, hoping that they ultimately take in more money than they spend, thus making a profit. Corporations exist on a larger scale. They allow anyone with enough money to invest in a share of the corporation, making them part owners.

From time to time, as the corporation makes money, it pays out dividends to its shareholders in accordance with the number of shares that they possess. Thus, a profit can be made from the investment.

And that is, of course, how people think of the stock market. Right?

Wrong.

Since people can sell their shares in the company, they are often more concerned with the value of their shares than they are with the profit, if any, that it is making for them. And that value is based on the buyers’ perception of how profitable the company is likely to be in the future.

And therein lies the weirdness. We have a system that is deeply dependent on, that that rewards, perception of future value rather than immediate profitability. The old-school principle of maintaining a slow, steady stream of income for the benefit of the shareholders seems to be vanishing. Profitability isn’t enough, or even necessary. We need more. Michael Douglas’ character was right: Greed is good.

On an intuitive level, this seems to me to be a system that is great for those who participate (i.e, Wall Street types), but that is remarkably unsustainable. Infinite growth seems to be an impossibility.

In other words, eventually, Wall Street will hit the wall. Then what?

I’m not sure. But it seems to me that the first step is for all of us to begin to recognize just how crazy this system has become.