There are times when companies and markets place too high a value on CEOs. Company heads, according to an AFL-CIO analysis of Federal data now make 287 times the salary of the average worker at S&P 500 companies. That number probably isn’t surprising to most people, but when you contrast it to the 1950s, when the ratio was around 20:1, it suggests at least some degree of overvaluation. The other side of the argument is that, if you accept that the principle role of a CEO is to add value for shareholders, those big numbers are entirely justified.
Numbers like those contained in this Economic Policy Institute paper, showing that CEO compensation has risen 940% since 1978 certainly sound shocking until you consider that stock prices, as represented by the S&P 500, have gained over 3,320% in that time. If there is a problem, it is more in the fact that average worker compensation in the same period has risen only 12%, but that is an argument about the very nature of capitalism and a free labor market, too big a subject to consider here.
The simple fact is that CEOs can make an enormous difference.
That is why Wells Fargo (WFC) was up significantly in this morning’s pre-market trading on news of the appointment of Charles Scharf to head the bank.
In this case, it may be more about the board finding somebody to take the role than who they actually appointed, but the effect on the stock is still likely to be positive for some time to come.
Wells Fargo has been beset by scandal and controversy for three years now, ever since it was revealed in 2016 that they had been opening new accounts without customers’ knowledge to inflate sales data. Investigation of that revealed other problems, and Tim Sloan, an insider who had replaced John Stumpf after the scandal forced his resignation, himself resigned in March.
Six months is a long time to go without a CEO for any company, but for one with WFC’s problems, it is an eternity. Those problems seemed to stem from a bad corporate culture, and that is one of the main things set by a Chief Executive. In many ways, a void at the top in those circumstances is the worst thing that could happen.
It still remains to be seen if Scharf can change that culture but based on his record at former employer BNY Mellon (BK), the chances look good.
If this appointment had been made in a normal environment rather than a scandal-plagued one, the market reaction would probably have been very different. As the chart below shows, BK has, over the last five years, underperformed the financial sector as represented by the Spider Sector ETF, XLF, by around 50%.
That is hardly inspiring for investors, but it hints at a conservative approach that is just what WFC needs right now.
It is reasonable to assume, given the struggle to find someone to take the role, that Scharf’s compensation package will only add to the growing disparity between CEO and worker pay, but for investors, that isn’t the point. All he has to do is say the right things over the next couple of months and the stock will continue to gain. So, even after this morning’s move up, WFC looks like a buy on this appointment.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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