CEOs and “Creating Value”
Today’s Globe and Mail carried a story on the front of the business section about Jason Underwood, CEO of Whiterock REIT (a real-estate development income trust).Â He earned $4.8 million compensation last year (an increase of 475% from the previous year), which is especially surprising since the entire fund has a market value of just $373 million.Â (REITs, like other income trusts, consist of investments in various operations which flow through to the trust’s unit-holders, thus evading the corporate income tax.)
There’s nothing really new about another exorbitant CEO compensation package.Â The thing that caught my attention was Mr. Underwood’s justification of his largesse:
“I hope people understand that I have been paid well because I have created a lot of value for investors, and if I did not perform I would be the lowest-paid executive in the industry.”
The latter claim is based on his base salary consisting of a mere $150,000 per year.Â The rest of his compensation is based on various bonuses tied toÂ the performance of the trust’s unit price.
Just for context, even if his annual income had been a mere $150,000 (unlikely to ever occur, given the low hurdles habitually established for these CEO bonus schemes), that would still put Mr. Underwood in the 97th percentile of Canadian earners.Â I don’t think the word “worst-paid” should ever be allowed to appear in the same sentence as “$150,000.”
But my bigger point has to do with his claim that he “created value” for investors.Â This self-important shorthand is regularly invoked by business leaders to justify whatever it is they are doing.Â But do CEOs really “create value,” even if the share price of whatever organization they are in charge of happened to increase in a certain time period?Â A more accurate and neutral statement would be that Mr. Underwood was in charge of this REIT during a year when the market value of its unit price increased.Â Does this mean he “created value”?Â Of course not.
The market value of those units could increase for all kinds of reasons that have nothing whatsoever to do with Mr. Underwood’s talents: like a renewal of low-interest credit creation being used for speculative purchases of real estate-related financial assets (gee, I’ve seen that movie before, and it doesn’t end nicely), overall investor sentiment, the impact of low interest rates on capitalized real estate prices, the impact of tax loopholes on the value of income trusts (indeed, Mr. Underwood’s firm would not even exist where it not for the enormous and blatant tax loophole for income trusts which the federal government is finally now partially closing), and other macro factors.
The only people in Mr. Underwood’s industry who actually “created value” are the workers who actually build and maintain the structures which his firm owns, operates, and markets.Â Needless to say, the compensation for these genuine value-creators did not increase by 475% last year.