Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ====== Salaries ====== Salaries represent the compensation a company pays to its employees for their services over a period. For an investor, this isn't just a line item; it's a crucial indicator of a company's health, efficiency, and culture. As one of the largest operating expenses for most businesses, salaries are typically found bundled within the 'Selling, General & Administrative' ([[SG&A]]) expenses on the [[Income Statement]]. A high salary bill isn't inherently bad—attracting top talent requires competitive pay. However, [[value investor]]s pay close attention to how this expense trends relative to [[Revenue]] and profits. Uncontrolled or excessive compensation, especially for executives, can erode profitability and signal a management team that prioritizes its own enrichment over shareholder returns. Analyzing salaries, therefore, provides a window into a company's cost discipline and the alignment of interests between its managers and its owners (the shareholders). ===== Why Salaries Matter to Investors ===== Think of a company’s revenue as a freshly baked pie. Before you, the owner, get your slice ([[net income]]), several other pieces have to be served. Salaries and wages are often the biggest slice taken out. Your job as an investor is to determine if that slice is a fair price for the baking (value creation) or if the chefs are simply eating too much of the pie. The level of salaries directly impacts a company's bottom line. All else being equal, lower salary costs lead to higher profits. However, it's a delicate balancing act. Slashing salaries might boost short-term profits, but it can lead to low morale, an inability to attract skilled workers, and a decline in quality, ultimately destroying long-term value. The key is **efficiency**. An investor wants to see a company that pays its people fairly and competitively to drive growth, without letting labor costs spiral out of control. ===== Analyzing Salaries on Financial Statements ===== You won't usually find a single, neat line item labeled "Salaries" on the main financial statements. You need to do a little digging. ==== Finding the Numbers ==== Most employee compensation is lumped into the SG&A line on the Income Statement. This category includes salaries for sales staff, marketing teams, corporate executives, and other administrative personnel. For a much juicier story, especially regarding the top brass, you need to look at the company’s annual [[proxy statement]] (often called a 'DEF 14A' filing in the United States). This document, filed before the annual shareholder meeting, provides a detailed breakdown of the compensation for top executives, including base salary, bonuses, and [[stock options]]. This is where you can spot potential red flags of excessive pay. ==== Key Ratios and Red Flags ==== To put the numbers into context, don't just look at the absolute dollar amount. Use these simple checks to gauge efficiency and management alignment: * **Salaries as a Percentage of Revenue:** Calculate this by dividing total SG&A (as a proxy for salaries) by total revenue. (SG&A / Revenue) x 100. Is this percentage stable, decreasing (a good sign of operating leverage), or increasing (a potential red flag)? How does it compare to direct competitors in the same industry? A software company will have a very different profile from a heavy manufacturing firm. * **Executive Pay vs. Company Performance:** This is the ultimate test. Look at the executives' pay in the proxy statement and compare its trend to the company's performance. Is the CEO getting a massive raise in a year when profits fell or the stock price tanked? Ideally, executive incentives should be tightly linked to long-term performance metrics like growth in [[earnings per share]] or [[return on invested capital]] (ROIC), not just a rising stock market. ===== A Value Investor's Perspective ===== Value investors cherish businesses run by frugal, shareholder-oriented managers. A culture of cost-consciousness often starts at the top. When a CEO accepts a reasonable salary and demonstrates a commitment to operational efficiency, it sends a powerful message throughout the entire organization. Conversely, exorbitant executive compensation, especially when untethered from performance, is one of the biggest red flags in investing. It suggests that management views the company as their personal piggy bank. As a shareholder, you are a part-owner of the business. You want a management team that acts like your partner in creating long-term value, not one that siphons off an undue share of the profits for itself. Always ask: Is management getting paid for creating real, sustainable value, or are they simply getting paid a lot? The answer can be the difference between a wonderful investment and a costly mistake.