The Business of Value Investing.pdf

Effective Business Valuation 115

others who feel it ’ s refl ective of the responsibilities of the job. For

purposes of this discussion, we evaluate executive compensation

merely to discern the motives and intentions of management. At

one end of the spectrum you have Warren Buffett, who continues to

earn the same $ 100,000 annual salary he has been getting for dec-

ades without any bonuses or stock options. On the other end, you

have Steve Jobs of Apple Computer, who took home over $ 646 mil-

lion in 2007, the vast majority of which came in the form of vested

stock options. 5 You won ’ t see shareholders in Apple Computer com-

plaining, however. In 2007, shares in Apple appreciated by over 120

percent, according to the Value Line Investment Survey.

For purposes of assessing the quality of management, executive

compensation should be evaluated on a case - by - case basis. There

is no magic formula or percentage to aid investors in this task.

A businesslike frame of mind is the most valuable tool in tackling

the appropriateness of executive compensation for each company.

For instance, is it appropriate for the CEO of a $ 30 million dollar

company to earn $ 1 million in a year during which the company ’ s

operating performance has deteriorated? Nearly everyone would

answer in the negative. Conversely, Apple shareholders will have no

problem with Steve Jobs earning over $ 600 million in cash and stock

in a single year in which he doubled shareholder investments.

With the exception of extreme outlier scenarios, the appropri-

ateness of executive compensation for any business will differ from

investor to investor. The key for the value - oriented investor is to

consider the compensation in the context of the overall value cre-

ated in the business.

Qualifications and Experience

There is no need to dwell on the obvious. In most cases, a company ’ s

board of directors will ensure that an adequately qualifi ed candidate is

running the company. But it doesn ’ t hurt to spend a little time getting

to know the skills of the man or woman responsible for the company.

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