CEOs of Public Companies Are Paid Peanuts Compared to Hedge Fund Managers

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It's that time of the year when executive compensation comes under heavy scrutiny as public companies release details on 2012 CEO pay packages and shareholders vote on them at annual meetings.

Some of the best-paid CEOs of 2012 include Oracle's ( ORCL ) founding CEO Larry Ellison, who received a $96.2 million package; Activision Blizzard's ( ATVI ) Robert Kotick ($64.9 million); CBS's ( CBS ) Les Moonves ($62.2 million); and Disney's ( DIS ) Robert Iger ($40.2 million).

Ellison and Facebook's ( FB ) Mark Zuckerberg, of course, are part of the symbolic $1-a-year salary club, though the amount they actually receive is far higher, thanks to options awards and other extras, as Ellison's example proves. Zuckerberg earned a cool $2.3 billion in 2012 because he cashed out some 60 million stock options. 2011's leader, Apple's (AAPL) Tim Cook, meanwhile, received a relatively paltry $4.2 million in cash.

With each year's release of CEO pay packages comes the inevitable discussion of whether or not these executives are overpaid. Citing growing income inequality and a larger-than-ever gulf between the earnings of a company's CEO and the average employee, many argue that CEO pay needs to be cut. For example, Fordham University assistant professor of sociology, Heather Gautney, argues at CNN :

Reining in CEO pay is not about killing incentives or punishing success, as free market ideologues contend. It's simply a matter of value. A more equitable arrangement acknowledges the value that hardworking people bring to our economic institutions and the social wealth of our country. And it exposes the outrageous over-valuation of investment bankers and corporate executives - inventors of financial products and management techniques with questionable social value.


Understandably, employees slam well-paid CEOs whose companies are struggling. Caterpillar's (CAT) head honcho Doug Oberhelman was roundly criticized by union workers for getting a 32% pay bump to $22.4 million in 2012 despite his company's lower-than-expected earnings.

"There's no secret to Caterpillar's approach to labor relations," said a United Steelworkers director Michael Bolton in a press release last week. "The company clearly is willing to hold jobs, families, and entire communities hostage in its drive to bust unions, depress workers' incomes, and slash workers' health insurance and other benefits so that Oberhelman and other top executives can cash in."

But while CEOs are always heavily scrutinized for their compensation packages, one wonders why the public is not even more critical of salaries of leaders in other sectors. Consider, for example, the salaries of top hedge fund managers, who take home enormous paydays without drawing anywhere near the ire that CEOs do.

According to Institutional Investors' annual ranking of the top-earning hedge fund managers in 2012, David Tepper of Appaloosa Management was the top of the class, earning an astounding $2.2 billion in 2012. The next three hedge fund managers after him -- Raymond Dalio of Bridgewater Associates, Steve Cohen of SAC Capital, and James Simons of Renaissance Technologies -- each cleared at least $1 billion. In all, the top 25 hedge fund managers made a total of $14.14 billion in 2012, which amazingly is the lowest total since 2008. In 2011, the top 25 took home $14.4 billion.

Appaloosa Management's David Tepper earned an astonishing $2.2 billion in 2012.


Hedge fund managers argue that their earnings are justified because they have a large risk-reward ratio since their fortunes are often intrinsically linked to their firms.

SAC Capital's Steven Cohen, for example, has a greater than 50% stake in his firm's estimated $15 billion in assets, meaning the pressure is on him to get his investments right.

But does that mean hedge fund managers deserve their sky-high paydays? Martin Hutchinson of Money Morning certainly doesn't think so. He writes:

In 2011, the average hedge fund lost money, even before the $14+ billion creamed off by the top 25 managers. In 2012 the average hedge fund made a weak 6.4% for its investors, according to Hedge Fund Research.

That means it trailed a passive portfolio of 40% bonds and 60% stocks by almost 5 percentage points. This is one of the big reasons I have disliked hedge funds for so long. They seem built more for managers amassing wealth than doing so for their investors.


It was the same story in 2012. The average hedge fund returned 6.4% in profit for its investors in 2012, according to Hedge Fund Research. In comparison, the S&P 500 (INDEXSP:.INX) rose 11.68%.


Some have also commented that the work that the hedge fund "masters of the universe," as they are often called, do pose a systemic risk to the economy. A 2012 independent RAND Corporation study found that while they did not play a pivotal role in the 2008 financial crisis, "the potential for hedge funds to build highly leveraged portfolios that turn out to be illiquid in periods of financial turmoil" could cause the market to freeze up.

So while hedge fund mangers like Tepper and Cohen earn billions, folks such as Goldman Sachs (GS) CEO Lloyd Blankfein and JPMorgan (JPM) CEO Jamie Dimon have to endure Congressional grillings while being the public symbols of Wall Street excess - all for the relatively paltry compensation of $21 million and $18.7 million respectively in 2012. It's almost enough to make one pity them.

Almost.

Also see:

8 Sweetheart CEOs: More Cash for Shareholders, But...

The Bizarre Habits of 9 Highly Obsessive CEOs

How Activist Hedge Funds Unlock Value for Shareholders


Twitter: @sterlingwong





The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: ATVI , CBS , DIS , FB , ORCL

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