The incentives driving Facebook's CEO v Commonwealth Bank's CEO

With Facebook crossing $1 Trillion in market value this week, we thought it would be worth highlighting the striking difference in incentives of a great founder-lead business in Zuckerberg/Facebook versus a stock held by nearly all Australian Super Funds - Commonwealth Bank. Immediately, two Charlie Munger quotes come to mind:

  1. “It is the unlikely extremes in outcomes – good or bad – that often instruct best

  2. “Show me the incentive and I’ll show you the outcome”

A few interesting points from the data presented in the tables below for the period FY12 (when Facebook listed) to FY21:

  • FBs market capitalization in FY12 was $70.8b v CBA of $88b

  • Zuckerberg’s total salary for the period was $500,008 (note he is currently being paid $1 per annum and has been since 2013) v Narev and Comyn’s of $19.1m

  • Zuckerberg’s total package (salary + stock options) for the period was $101m v Narev and Comyn’s of $82.1m

  • Zuckerberg’s value creation for the period was $775b v Narev and Comyn’s of $69b (adjusted for share issuances)

  • Zuckerberg’s has been paid an extra $20m for creating an extra $706b in value for shareholders

I’m sure there are many counterarguments to this comparison ie. this isn’t 'apples-to-apples' … banks v a social network. However, our point is a ‘directional one’ … given the vast number of opportunities (stocks) to invest in, why would you place your capital with professional CEOs whose payoff for a poor decision/s is a salary of a few million a year ?!?!

Core to our investment philosophy is backing great founders in great business models and making probability-weighted bets on which ones are most likely to outperform the market.

We believe shareholder-friendly behaviours such as: low salaries coupled with aligned incentives; high insider ownership; clean accounting; a board of business savvy individuals; transparent communication … and most importantly …. very careful issuance share capital ….. tilt the probabilities of successful investment performance in our favour.

Thanks for reading,

Lachlan Morgan, CFA