The Weekend Edition is pulled from the daily Stansberry Digest.
You've finally made it...
You've put in long hours week after week, steadily climbing the corporate ladder for the past two decades. And now, all that hard work has paid off with the ultimate reward...
You've been named the CEO of a multimillion-dollar, publicly traded company.
It's your big shot to build real wealth. So what should you do to make the most of the opportunity?
Maybe something illegal.
Today, I will show you why more and more CEOs are structuring their pay the way they do, why this encourages risky – and sometimes illegal – behavior, and how you can get paid in a similar way (without breaking the law, of course).
It goes without saying that CEOs collect big paychecks...
In 2018, the median cash salary for CEOs at midsize U.S. corporations – companies with revenues between $1 billion and $5 billion – came in at $1.9 million. That sort of base pay can support a comfortable lifestyle for sure. But it's just scratching the surface...
You see, a CEO's real boost in pay comes from joining in the growth of the company as part owners. This ownership can come in many forms... It can be a straight-up grant of stock if the company hits certain targets, or it can be options to buy stock under similar thresholds.
When you factor in the equity portion of these compensation packages – stock and option bonuses – the median payout for CEOs at midsize companies was more than $5 million last year. And when you look at larger companies, the packages can be downright ridiculous...
Scanning the list of highest-paid CEOs in 2018, according to the New York Times and data firm Equilar, the compensation for Discovery's (DISCA) David Zaslav totaled $129 million... Palo Alto Networks' (PANW) Nikesh Arora totaled $125 million... and Oracle's (ORCL) Mark Hurd and Safra Catz each totaled $108 million.
Most of these payouts didn't come from annual salaries. For example, Arora's cash salary totaled just $155,768, while Hurd and Catz each took home $950,000 in salary last year.
Meanwhile, one CEO blew them all away... Last year, Tesla (TSLA) CEO Elon Musk's total compensation was valued at more than $2.2 billion.
The thing is, these CEOs didn't actually realize the bulk of these big payouts – at least not yet...
It's a trend that has accelerated over the past few decades... CEOs understand the big payday doesn't come from simply collecting a regular check. It doesn't even come from working hard to see the company's stock price rise 10% – in turn, boosting the value of their shares by the same percentage. A CEO wants a much bigger payday than regular investors.
So instead, CEOs started designing their pay packages to be highly levered to the stock's performance... Earn a decent return for shareholders, earn a massive one for yourself.
And that brings us to the lure for CEOs to do something illegal...
You see, a CEO is never expected to show up in front of the company's board of directors with his checkbook to compensate for losses that might happen as a result of his actions. When the CEO makes a risky acquisition, aggressive expansion, or breaks the law outright... he can potentially boost his compensation without worrying about facing the financial consequences.
On one hand, the CEO could get in trouble with the authorities. That would sully his reputation, and he'd have to deal with paying some legal fees. But on the other hand, if he can grow the company without getting caught, the payoff could be worth hundreds of millions of dollars.
In other words, there's little downside to prevent a CEO from bending the rules.
You can see this in the way CEOs act... An analysis in the Harvard Business Review from 2016 found that the greater the CEO's pay depends on performance bonuses, the more likely he is to break environmental and accounting laws.
But the problem isn't just greed – it's structural...
By that, I mean CEOs figured out a long time ago that they don't face much downside. That's why they've increasingly structured their compensation packages like "call options."
As part of their compensation packages, the majority of CEOs do receive call options in a literal sense. But the actual job of a CEO is structured like a call option, too...
If a stock rises 10%, 50%, or 100%, it's great for both the CEO and shareholders. On the flip side, if the CEO takes too much risk, makes too many acquisitions that he can't handle, or breaks any laws... shareholders can collectively lose hundreds of billions of dollars. Meanwhile, the CEO will likely still collect a large severance package, even if he loses his job.
This tremendous upside with limited downside for the CEO is the same as buying a call option.
You might not really have the chance – or desire – to become a CEO, but you can still get paid like one...
If you're like most investors, you probably hold the majority of your portfolio in stocks. You buy shares of different companies and hopefully watch as the stocks move higher while you hold them. You can expect to earn around 7% or 8% a year on a diversified portfolio.
That's great... There's no better way to build your wealth over the long term. It's exactly what we advocate doing here at Stansberry Research.
But it takes patience. And it can be frustrating. You have to sit and take what the market gives you... and endure what it takes away if your holdings go down.
That's why we like to use options in a low-risk way to give ourselves the chance to significantly boost our overall returns...
Like a CEO and his compensation package, options set us up for a shot to get paid much bigger amounts if we're right about our investments. And if used properly, they also allow us to do this in a way that reduces our overall risk.
Let's go back to Musk for a hypothetical example of how this could play out...
Now, I need to be clear: Unlike some CEOs, I don't know if Musk has actually committed any crimes (though he did settle fraud charges with the U.S. Securities and Exchange Commission last year). But he has acted like a CEO with little worry about consequences...
Over the years, Musk has been extremely aggressive with his projections and carefree with some of the information he has put out about Tesla. You can't blame him. As I said, CEOs can earn huge payouts from boosting the company's share price to certain thresholds.
In fact, essentially all of Musk's compensation package in 2018 came in stock option awards. Musk was granted options that are valued at $2.6 billion today. But if Tesla's shares rise substantially over the next 10 years, they'll be worth around $55.8 billion.
Tesla's market cap is around $40 billion today. If it reaches $100 billion, Musk would be awarded one-twelfth of his stock options – 1.69 million shares worth around $972 million. Put another way... if Tesla's stock climbs about 160% – from its current share price of roughly $220 to $576 – Musk would realize a 350% gain on $216 million of his equity grant.
And remember, that's just a small portion of Musk's potential haul if Tesla's stock soars.
Of course, with options, you can't make anywhere close to the billions of dollars that Musk could. But you can earn a similar – or better – return on investment by using them...
Right now, you could buy, to open, the TSLA January 2021 $260 calls for around $4,900. If Tesla's stock were to rise to $576 in the next year and a half, your position would be worth $31,600 ($576 share price minus the $260 strike price times 100 shares). In other words... if Tesla's stock gained about 160% before January 2021, your returns would be more than 500%.
Before I go any further, please don't make this trade. It's just a hypothetical example to show how you could potentially use options to "juice" your returns – like a CEO.
I don't believe Tesla will come close to that price. If I had to, I'd be more likely to bet that Tesla's stock will drop in the years ahead by using options in another way – buying puts.
My point is, you can use these financial tools on all sorts of stocks to earn CEO-like payouts...
After finding a stock that you believe will go up, you can use options to tailor your return opportunities... making them more attractive than just a basic "buy and hold" strategy. (Or you can do the opposite and turn unpredictable stocks into conservative income machines.)
To be clear, this strategy is speculative and aggressive. But it's fun and profitable.
In his newest trading service, my colleague Dr. David "Doc" Eifrig and our research team have been doing this since December...
For instance, last October, Porter's research team published a compelling case in Stansberry's Investment Advisory for why it was a good time to invest in coffee-shop giant Starbucks (SBUX). The company had improved its margins and shares looked cheap.
Doc and I agreed with their analysis. But in January, we took things a step further...
We had a more specific view. We saw that Starbucks' shares had momentum. And at the time, investors were clamoring for "safe" plays on consumer habits. We also believed the company's successful expansion into China would surprise investors in a good way.
After putting everything together, we believed Starbucks wasn't just set for a long-term rally... but also an immediate one. We built that outlook into a simple options trade.
And it paid off... As Starbucks' share price rose roughly 7%, our short-term options play worked perfectly, returning 71% – in just 25 days.
Again, options aren't necessarily right for everybody. But the tools are out there if you're interested.
Whether you want to get paid like a CEO and make calculated bets on huge gains... or collect consistent income like an insurance company... we believe investors owe it to themselves to learn that these opportunities exist.
Fortunately, there's never been a better time to do so...
That's because Doc recently held his first-ever trading "Master Class" for a small group of interested subscribers at our Stansberry Research headquarters in Baltimore.
He walked folks just like yourself step-by-step through this strategy to show how to make up to 10 times higher returns than by buying stocks the usual way. You can use this strategy to earn big returns in up markets... down markets... and even flat markets.
For a limited time, you can watch a replay of Doc's training session for free right here.
Editor's note: Thousands of folks tuned in Wednesday night as Doc hosted his first-ever trading "Master Class." If you weren't one of them, that's OK. You can still see why we believe that learning his techniques could change the way you invest forever. But don't delay... The replay will only be available for the next few days. Watch it right here.