Active vs passive management

[Father Dougal]

Fellow Mustachians,
While trying to persuade myself of the value of buying more index trackers, I found this gem:

https://server.capgroup.com/capgroup/action/getContent/file/GIG/North_America/Market_Insights/Capitals_Views/VP_0411_ActiveMgmt.pdf

Now, I think there is some dodgy maths (or math) going on here...  what do you think?

FD

[gmaxwell]

In ten seconds of looking the two areas where they're obviously "lying with science" that stand out for me are:

The returns of the best active managers — those in the top quartile — have meanwhile been exceptional

This is meaningless. If you take the top quartile of even totally random strategies, you're going to get high returns. ... because ... you're ... taking ... the top. It must be high, by definition!  (Oddly, their numbers sound a bit _low_ if compared to the S&P500 for a top quintile, assuming a normal distribution)

There is an old fax scam:  You get 100k fax numbers and fax each of them a random stock pick. Then you see which of  the picks turned out bad and you discard the numbers you faxed them to. Next week, you do the same— but perhaps with only 75k numbers.... you repeat this process until in a few months you have some list of 10 people who all think you're some kind of impossibly accurate stock god, and then you direct them to make some really-profitable-to-you move.

The question is— if you're on the receiving end how can you tell if you're seeing good performance or a selection bias?   In this case there is no question— they're outright telling you that they're taking the best (or median, in the other graphic): poor performance is excluded by definition.

The median active manager has consistently beaten broad market benchmarks over time

But they have not— net of fees— which the paper only admits indirectly on the last page: "funds in the highest quintile for active share beat their benchmarks by up to 2.4% per year on a gross basis and by 1.5% per year after fees.* Funds in the next-highest quintile for active share also beat their benchmarks after fees, while those in the other three quintiles did not"— the median is in the third quintile.

I think people often overstate the efficient market hypothesis in order to attack it. Excess returns exist— the removal of them is what makes markets tend to efficiency.  But in a competitive market we should generally expect to see the cost of acquiring excess returns tend to their value.  And indeed— it's not even that good: their median active funds don't pay their fees by that paper's own numbers.

How do you get the "good" funds? If you pick active funds by past performance you may well be simply buying yourself a seat at a lucky fax number. At least on the basis of the information in that paper there may well not exist any funds that deliver excess performance post-fees, since the high performance of the top is expected on the basis of chance alone— the fact that the median isn't breaking even after fees is a pretty severe indictment once you consider that funds which had historical under-performance get closed.  ... and to whatever extent prudent selection _might_ net you an overperforming fund beyond chance it still comes with considerable risk of getting an under-performing one:  What you really should want is not something with the highest returns but something with the highest risk adjusted returns.  Seeking high returns alone isn't investing: it's gambling.

[zunachy]

Yeah the article is meant to confuse and sell. 

That being said, the other side uses the very same strategy.  A lot of abstract terms are not defined clearly: Terms like "strong" versus "weak".  Or idea that it takes "a lot" of work to beat the market.  What does "a lot" mean?  Isn't it more interesting to try to understand what it means to "be" in the market, and what it actually mean to "beat" the market?

If someone approaches you and asks for your money, and also asks to charge fees for holding that money, in return for a promise to be "active" with that money, tell them to go active themselves.  Unless they are wiling to explain every single buy, sell, and hold decisions, and you understand, agree, and believe in their strategy, you should not bother.

The other side, the sellers of index funds, are not borderline malicious as the active people are, but I do believe that they are confused by what it is they are offering.  The whole theory of efficient markets does not work, because it is impossible to value most companies.  It should not matter that millions of people vote for a company with their money, if it is impossible to obtain an answer then that is just the way things are.  The whole world has been wrong before many times. 

What the index fund bet really is is this:  The total market value of the S&P-500 today, to use as an example,  is approximately 14 trillion.  This value represents the combination of human ingenuity, work and use of capital. The 14 trillion is some part of all the money in the world, let's say X percent.  Your bet then is that in 5, 10 or 20 years that value will be a greater portion of all the money in the world.  You are in fact betting that we humans, using our ingenuity and capital can continue to create value and better our lives.  This is good bet to have.  And, this is the best bet to have if you don't want to take the time to analyse individual companies.  You only choice then is if you want to bet on the whole world, the whole industrial world, all the Americans, all the Canadians, all the Europeans, etc, etc.     

[Father Dougal]

Zunachy and gmaxwell,

I think you are both exactly right. I was suspicious that Capital Group did not publish their own performance as an illustration of how a good manager consistently beats the market!

Data I have read about elsewhere suggests that 80% of fund managers do not beat the index after costs.  If a fund manager offered a service which guaranteed to be in the top quintile every year, I think most investors would jump at it.  And that’s what we seem to have with the index funds and index ETFs. It seems like the financial industry is asking you to pay a high price for the chance of higher returns than the index, but the odds are poor.

And yet we have Warren Buffett and his great returns.  But I don’t think he is an investor in the same way most of us are.  When he takes a stake in a company it is often a large stake and so he can influence or control management.  This type of control or shareholder activism has the potential to improve the management of the firm (or at least it is run more for shareholders than for the benefit of management).  In addition, WB’s insurance business gives him a large pot of cash to invest at zero interest cost.  A geared investment in a rising market at zero percent interest gives a great return. 

Anyway, I will continue to search for even more hard data with which to demolish the anti-index argument.

All the best.
FD.

[aj_yooper]

In investing, being average with respect to a major index is good and being cost * and tax* efficient in investing is crucial. 

In The Little Book of Common Sense Investing John Vogle quotes Warren Buffett:  "A low-cost index fund is the most sensible equity investment for the great majority of investors.  My mentor, Ben Graham, took this position many years ago and everything I have seen since convinces me of its truth." (page 186). 

[Kazimieras]

I received some wise words from a very intelligent economics professor once, who was telling us the work of a Nobel prize winner in Economics. The laureate's result was that int he long run passive beats active, always.

And here is the logic:

If you invest in the index, you will be rewarded with whatever gains or losses the market gives. You will follow it pretty much exactly. As it is passively managed, the fees are quite low, and let's just say for argument's sake they are pretty close to zero.

If you actively manage a fund you have three options, you can be above the market returns, same as the market returns, or less than the market returns. Well the active management costs more than the passive, so if it just makes market returns, you're better off with the passive fund. And obviously you don't want less than the market return, since you would be much better off with the passive fund. So logically the only way active management makes sense is if it can beat the market. Right?

So in order for the active management to be worthwhile, it needs to match the market and then beat it by its increase expense cost AND then some (since otherwise it is safer to just go with the passive fund). Well if all active management was above the market rate of return, the index would be pulled up along with it... making the active management ineffective. So obviously not everyone can perform above the market. Once you factor in the market being a zero-sum game (for each winner there is a loser), the active management guys don't stand a chance.

[Undecided]

Well if all active management was above the market rate of return, the index would be pulled up along with it... making the active management ineffective.

I don't (much) use actively-managed funds or make direct stock picks, and I'm not advocating for them, but (i) why would the success of of active managers in picking only above-average performers from within an index alter the overall return of the index? and (ii) why is it relevant to address a hypothetical in which all active management was above the market rate of return? If people think they can pick better-than-average stocks, certainly they think they can pick better-than-average pickers of stocks, right?

[Kazimieras]

(i) why would the success of of active managers in picking only above-average performers from within an index alter the overall return of the index? and (ii) why is it relevant to address a hypothetical in which all active management was above the market rate of return? If people think they can pick better-than-average stocks, certainly they think they can pick better-than-average pickers of stocks, right?

i) Because if active management worked the way "most" people thinks it does, all active management should be performing above the market. Otherwise it is a sham, since if it did worse than the market, you're better off to invest in the index

ii) If you operate under the assumption that active management is better than passive and that it will outperform passive management a few things happen. First, remember that the index is passive. The market is also made of active and passive funds. If active performed better than the market, and the rest of the market is full of passive funds... the passive funds have to be pulled up. Otherwise it wouldn't be an index.

The question isn't if people *think* they can pick better. I can tell you a lot of people that are GREAT at playing the lottery. They just pick good numbers (honestly most winners will say that). If you have a lot of people doing something you will get outliers. The point is that people will get good runs and will beat the market, for a time. But eventually the streak runs out.

[pom]

also this is a gem:

"Survivorship bias may play a role in the consistency of greater excess returns for longer time periods. The barriers to entry in the asset management industry are low and the costs of setting up a business have fallen. The manager universe for short periods includes organizations whose fragile investment processes and poor results drag average active returns down. Successful investment managers are more likely to survive and populate the manager universe for longer periods."

Imagine you have 1000 monkeys with darts and they pick stocks randomly each period. Every period you remove the 50% monkeys that did the worse. After 5 years you are left with 31 monkeys. If you then look at the 5-year track records of monkeys but you include only the monkeys that stayed 5+ years, then you will have a proof that monkeys are excellent at picking stocks.

[Khan]

Once you factor in the market being a zero-sum game (for each winner there is a loser), the active management guys don't stand a chance.

The market is not a zero sum game. Dividends and stock buybacks being two of the most predominant(maybe only) such things.

Yes there are relatively zero-sum players(HFT's, traders, etc) but the entire overall market is -not- a zero sum field.

[Undecided]

(i) why would the success of of active managers in picking only above-average performers from within an index alter the overall return of the index? and (ii) why is it relevant to address a hypothetical in which all active management was above the market rate of return? If people think they can pick better-than-average stocks, certainly they think they can pick better-than-average pickers of stocks, right?

i) Because if active management worked the way "most" people thinks it does, all active management should be performing above the market. Otherwise it is a sham, since if it did worse than the market, you're better off to invest in the index

ii) If you operate under the assumption that active management is better than passive and that it will outperform passive management a few things happen. First, remember that the index is passive. The market is also made of active and passive funds. If active performed better than the market, and the rest of the market is full of passive funds... the passive funds have to be pulled up. Otherwise it wouldn't be an index.

The question isn't if people *think* they can pick better. I can tell you a lot of people that are GREAT at playing the lottery. They just pick good numbers (honestly most winners will say that). If you have a lot of people doing something you will get outliers. The point is that people will get good runs and will beat the market, for a time. But eventually the streak runs out.

Your (ii) doesn't make any sense. Say there are ten stocks (of equally-sized companies, which don't pay dividends) in the entire market, and in any year ("randomly"), 8 of them grow 8% year over year, one of them grows 2% year over year and one of them grows 14% year over year. If you hold the index (i.e., all the stocks in this market in equal proportions), you'll see 8% annual growth. If you manage to pick five stocks (in equal proportions) to hold in any year that include the big gainer and exclude the smallest gainer, you'll see growth over 9%. You haven't changed the composition of the index or the overall return of the index, you've merely excluded that year's loser.

Also, I don't know that people believe or assume (i); people display a range of talent in virtually every activity, so why not stock picking? I've never heard someone say "one portfolio manager is as good as any other."

Again, I don't have any interest in supporting active management as a real-world investment approach (but don't much care if others want to), I just don't think this supposedly "logical" argument against it makes sense.

[Khan]

The problem Undecided, and one which I can completely agree with the Index only group, is that if you're not working with non-closed end hedge funds(which none of us have the money to get into), then you're working with players so big they essentially -are- the market, and because their fee structures are so terrible, and how they run -their business- of getting money from you, you must therefore lag the market.

The problem I have is when that bleeds over into saying people like Peter Lynch and Warren Buffet are just aberrations, and not A: Actually skilled investors that B: used all their available resources to C: Beat the market.

And the other problem I have is that I believe careful pruning and choosing of your investments, with an eye towards the long view on things, can still produce better results then "The market". If Index investors want to argue that you can't beat "the market", I'll choose to disagree. If however they want to tell me that I'd be better served by choosing less nuclear sized options like "The S&P 500" and instead choosing more pointed indexes, such as VIG or MGV then doing my own legwork, I can't really argue against such statements.

Speaking of which, I think MGV's my next investment.

[matchewed]

But pointing at outliers like Buffet and Lynch and saying why not me is missing the fact that they're outliers regardless of the reason they are outliers. They could be outliers because of voodoo or crazy intelligence and skill. Still makes them outliers. What makes you think you're an outlier?

[Undecided]

The problem Undecided, and one which I can completely agree with the Index only group, is that if you're not working with non-closed end hedge funds(which none of us have the money to get into), then you're working with players so big they essentially -are- the market, and because their fee structures are so terrible, and how they run -their business- of getting money from you, you must therefore lag the market.

Maybe that's a problem with the opportunities available to many investors (but I don't think it is a problem for everyone here; although I don't have any vast fortune, I am an accredited investor and I represent investment advisors who will let me invest amounts substantially below their typically applicable minimums---and I still don't), but I'm just responding to the logical/conceptual argument about the impossibility of having market-beating active managers. I'm totally ok with people claiming "it's practically impossible for most people to pick a market-beating manager, don't even try!"---but asserting some sort of logical impossibility to the whole thing seems as misleading as what people claim the active managers are doing.

[grantmeaname]

First, remember that the index is passive. The market is also made of active and passive funds. If active performed better than the market, and the rest of the market is full of passive funds... the passive funds have to be pulled up. Otherwise it wouldn't be an index.

That's ignoring day traders, people who directly hold company stock in their retirement accounts or through ESOP/ESPP, pension and insurance funds, and every other non-mutual-fund investment vehicles. But mutual funds make up less than a third of the equity market, and even less of the debt market. Index funds don't track the average active mutual fund, they track the average performance of the underlying securities.

[Freeyourchains2]

You all are forgetting one big thing you are giving up when investing in Funds.

Your Proxy Vote!

By investing into any Fund (and not hand picking your stocks), you are giving up your vote to the Fund Manager.

This fund Manager then can do many things with these votes, and they usually sell them to the highest bidder.

 CEO's then bribe or do "deals" with the fund manager for his votes. By setting the default proxy vote to "for". Then they propose to the stockholders, (any left?) for Salary, bonus, share, and all corporate perk increases per year. 

(this is how CEO's pay has increased 300x of the last decade, automatically).

Because Investor's are giving up one thing that is greater then money. Power.

The are giving up their power to vote or to even fight against new policies.

[arebelspy]

Hmm good point.  I'll consider it.

Okay, I'll give up my proxy vote (which I wouldn't use anyways) for lower fees and hundreds of thousands of dollars extra in my pocket over the next few decades.  Deal.

[matchewed]

You all are forgetting one big thing you are giving up when investing in Funds.

Your Proxy Vote!

By investing into any Fund (and not hand picking your stocks), you are giving up your vote to the Fund Manager.

This fund Manager then can do many things with these votes, and they usually sell them to the highest bidder.

 CEO's then bribe or do "deals" with the fund manager for his votes. By setting the default proxy vote to "for". Then they propose to the stockholders, (any left?) for Salary, bonus, share, and all corporate perk increases per year. 

(this is how CEO's pay has increased 300x of the last decade, automatically).

Because Investor's are giving up one thing that is greater then money. Power.

The are giving up their power to vote or to even fight against new policies.

Funny enough "Say on pay" only came about after the 2008 dip. Prior to that there was no requirement for CEO compensation to be passed before shareholders. So don't dump that turd on index fund managers. Leave that one right where it belongs with the members of the board.

But other than that you are right. Index fund investors give up their ability to vote for individual companies. I'm okay with that for arebelspy's reasons.

[Undecided]

You all are forgetting one big thing you are giving up when investing in Funds.

Your Proxy Vote!

By investing into any Fund (and not hand picking your stocks), you are giving up your vote to the Fund Manager.

This fund Manager then can do many things with these votes, and they usually sell them to the highest bidder.

 CEO's then bribe or do "deals" with the fund manager for his votes. By setting the default proxy vote to "for". Then they propose to the stockholders, (any left?) for Salary, bonus, share, and all corporate perk increases per year. 

(this is how CEO's pay has increased 300x of the last decade, automatically).

Because Investor's are giving up one thing that is greater then money. Power.

The are giving up their power to vote or to even fight against new policies.

Funny enough "Say on pay" only came about after the 2008 dip. Prior to that there was no requirement for CEO compensation to be passed before shareholders. So don't dump that turd on index fund managers. Leave that one right where it belongs with the members of the board.

But other than that you are right. Index fund investors give up their ability to vote for individual companies. I'm okay with that for arebelspy's reasons.

While mutual fund holders don't have pass-through voting power, the voting policies of major money managers are fairly transparent (e.g., https://investor.vanguard.com/about/vanguards-proxy-voting-guidelines), and they are (and have been for about 10 years) required to disclose how they actually voted (e.g., http://www.sec.gov/Archives/edgar/data/105563/000093247112005279/wellingtonfund0021.htm). So while an investor may just not care about how a manager will vote, the information is easy to find (being ignorant of that doesn't change it).

Further, personally, having represented numerous issuers regarding contentious shareholder meeting proposals, I don't see any support for Freeyourchains2's claim that issuers are able to "bribe" or do a "deal" for mutual fund managers that influences their vote. (You might be interested in reading U.S Regulation S-K Item 404, which is incorporated into public companies' disclosure requirements in their 10-K or proxy statement, and requires them to disclose transactions and relationships with, among others, owners of more than 5% of their stock.) My personal experience suggests that in recent years, some of the largest mutual fund complexes have become much more willing to side with "activist investors" who take the lead in opposing management and board recommendations on corporate governance and compensation issues (although not so much on the so-called "social justice" issues).

[pom]

this is how CEO's pay has increased 300x of the last decade, automatically.

What helps a lot in a debate is if everyone does not just make up statistics.

Average CEO pay of top 350 companies in 2002 : 9.8 million (in 2012 dollars)
Average CEO pay of top 350 companies in 2012 : 10.7 million
Average increase per year: Inflation + 0.9%

Source: http://www.epi.org/publication/ceo-pay-2012-extraordinarily-high/

You want to make a point, fine, but don't assume that we are a bunch of dumb guys in a bar.

[arebelspy]

this is how CEO's pay has increased 300x of the last decade, automatically.

What helps a lot in a debate is if everyone does not just make up statistics.

Average CEO pay of top 350 companies in 2002 : 9.8 million (in 2012 dollars)
Average CEO pay of top 350 companies in 2012 : 10.7 million
Average increase per year: Inflation + 0.9%

Source: http://www.epi.org/publication/ceo-pay-2012-extraordinarily-high/

You want to make a point, fine, but don't assume that we are a bunch of dumb guys in a bar.

This post shows why I love this community.  Thanks pom for doing the work to debunk bullshit.

[germandude]

Its not possible for big active fund managers to perform better than the market, but that doesn`t mean that its impossible to do as a competent investor for himself.

There is the smallcap-value anomaly found by fama and french and there are the superinvestors of graham and doddsville. :)
I can recommend reading "The intelligent investor" of Graham, it is a really good book to understand businesses and reading balance sheets.

http://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-and-Doddsville
http://en.wikipedia.org/wiki/Fama%E2%80%93French_three-factor_model

[matchewed]

But germandude you contradict yourself. You say it is not possible for fund mnagers to perform better than market then proceed to link to a wiki article about statements by Buffet which say the exact opposite. So is it possible or is it not? What does graham and doddsville have to do with an individual "competent investor" (what does that mean btw? what is competent about the one that succeeds and what is not competent about the one that fails? If I bet on the wrong horse am I an incompetent gambler?).

[germandude]

They cannot because of fees and the problem that they can`t effectivly handle fresh money in the fund. When they don`t invest it as they get it their return will suffer. When someone sells their fund they have to sell securities, if they want or not (and because that are often the times when its not wise to sell, this will bring their performance down). And they cannot buy small cap stocks with big money, because they would influence the stock price too much.
That are the true reasons an active fund cannot outperform the market. Graham did know this back in 1930 where i wasn`t even born. Some things stay the same no matter what time it is :).

[matchewed]

So you're linking to Buffet's speech that they can because...?

I agree that generally active funds do not outperform the market please don't think that I'm advocating that they can. But I don't think the individual investor can do better than a fund manager. And I'm curious if there would be some study looking at that. To the research mobile!

[germandude]

I am linking it because here in the forum there is allways the mantra 'buy index funds, its the only thing that works', and i wanted to point out that that is not the case. Index funds are good, but with very much work its possible to beat that. If you are looking for studies search for the Fama&French Model.

[matchewed]

I just want to understand your position. And please correct me if I'm wrong.

With work actively managed funds can beat the market, see the Buffet article, but they can't because of fees, however an individual investor can beat the market, if they can work very hard.

So instead of doing index funds and getting market returns I should instead spend a large chunk of my time and work very hard to beat the market returns. No thanks I'd rather get on with doing the stuff I find fun and y'know finish my accumulation phase.

Plus if it is just a matter of hard work and time where are all the really really rich people who got rich off of solely the stock market? There are tons of things out there that are just a matter of hard work that people accomplish all the time. Becoming rich off the stock market is not one of them, or at least know one has proven that.

[germandude]

Yes thats my point, and your point with index funds is totally ok :).

[Freeyourchains2]

this is how CEO's pay has increased 300x of the last decade, automatically.

What helps a lot in a debate is if everyone does not just make up statistics.

Average CEO pay of top 350 companies in 2002 : 9.8 million (in 2012 dollars)
Average CEO pay of top 350 companies in 2012 : 10.7 million
Average increase per year: Inflation + 0.9%

Source: http://www.epi.org/publication/ceo-pay-2012-extraordinarily-high/

You want to make a point, fine, but don't assume that we are a bunch of dumb guys in a bar.

This post shows why I love this community.  Thanks pom for doing the work to debunk bullshit.

"CEOs earned $12.9 million on average in total pay last year -- 380 times more than a typical American worker, says the AFL-CIO.

The labor group unveiled an updated website database http://www.aflcio.org/Corporate-Watch/CEO-Pay-and-You compiled from 300 companies based on filings with the U.S. Securities and Exchange Commission. The union group uses the Bureau of Labor Statistics wage data to define typical worker pay, which was $34,053 for all occupations last year."

http://money.cnn.com/2012/04/19/news/economy/ceo-pay/index.htm

You call that bullshit?

[arebelspy]

Absolutely.

Saying they get paid 380x more than a typical worker is WAY different than saying their pay increased 300x.

Had their pay increased 300x as you claimed, the average CEO would have gone from 9.8MM in 2012 dollars in 2002 to almost 3 billion annually each.

[pom]

Freeyourchain,

I was just saying that we need to stay as factual as possible to have a worth-having discussion. And like arebelspy mention, you can't equate pay ratios with pay increases .

Also I don't think the AFLCIO is a totally neutral source .... however in this case that ratio seems legit. I'll admit that in CEO pay stats, it is hard to find a really neutral source of info.

Anyway, I don't think anyone here would dispute that some or most of CEOs are overpaid and I agree with you that one advantage of owning individual securities is that you can vote and influence this situation. Although I would dispute that fund managers sell the votes they are entrusted with, I know quite a few fund managers and they don't do that; they do have a tendency to vote with management because they don't want to rock the boat (and in their ethic guidelines from the CFA institute to name one, maximizing return to the client is a priority over making the world better).

[Freeyourchains2]

Absolutely.

Saying they get paid 380x more than a typical worker is WAY different than saying their pay increased 300x.

Had their pay increased 300x as you claimed, the average CEO would have gone from 9.8MM in 2012 dollars in 2002 to almost 3 billion annually each.

Oh your right, they just changed their title from "CEO" to "Hedge Fund Manager" now a days and make $2 Billion/ year like George Soros and Carl Ichan by using other's people's money to make money and pass on all the risk to the account holders/customers.

[matchewed]

Absolutely.

Saying they get paid 380x more than a typical worker is WAY different than saying their pay increased 300x.

Had their pay increased 300x as you claimed, the average CEO would have gone from 9.8MM in 2012 dollars in 2002 to almost 3 billion annually each.

Oh your right, they just changed their title from "CEO" to "Hedge Fund Manager" now a days and make $2 Billion/ year like George Soros and Carl Ichan by using other's people's money to make money and pass on all the risk to the account holders/customers.

It's like having a conversation with word salad. What does that have to do with you being wrong about CEO pay?

[grantmeaname]

Icah and Soros have both been in business for 50+ years and they're worth only $20B each, not the $100B that your bullshit figure would suggest. Not only that, but they're the extreme end of the long tail - they're both in the top 100 richest people in the world.

If your understanding of capital markets doesn't allow you to distinguish between hedge fund managers and CEOs I doubt you can really produce 120% returns.

[Freeyourchains2]

Absolutely.

Saying they get paid 380x more than a typical worker is WAY different than saying their pay increased 300x.

Had their pay increased 300x as you claimed, the average CEO would have gone from 9.8MM in 2012 dollars in 2002 to almost 3 billion annually each.

Oh your right, they just changed their title from "CEO" to "Hedge Fund Manager" now a days and make $2 Billion/ year like George Soros and Carl Ichan by using other's people's money to make money and pass on all the risk to the account holders/customers.

It's like having a conversation with word salad. What does that have to do with you being wrong about CEO pay?

CEO's get to increase their pay every year, by passing "for" default proxy votes on to shareholders, whom don't individually even own over 1% of the company, and whom don't care to vote, so their vote defaults to "for". Typically funds own a lot more shares collected as a pool of individual investors, whose right to proxy vote are taken away.

A worker must talk/beg to their boss to increase their pay to at a lifetime most of $100k per year if they have a bachelor's degree, $200k most if they have a Ph.d.
The closer their salary gets to $100k or max, the closer they are to being fired or laid off by management whom makes well over $100k and up dependent if they are on top.

The pyramid must be maintained, with the pharaoh's on top taking the most profits to continue to maintain order and structure to the subordinates.

Of course, usually founders and owners passively manage companies after a certain point, because they want to enjoy their rich financial independent lives. Thus they hire or promote senior managers to the board of directors and officer positions to run the company on a day to day operations basis for them.

CEOs pay increases because of the stock options granted per year, and because the company tends to grow as they oversee the company and try to increase earnings.

Workers don't get paid in stock options or profit sharing usually. So as the company increases, it doesn't reflect their pay increase.

3% of $60k = $1,800 increase for the workers that year.

3% of $120 Million to $40 Billion value of Stock Options = $3.6 Million to $1.2 Billion increase for the CEOs that year, depending on the number of shares and stock prices of those shares in the company that you are granted exclusive privilege to.

[matchewed]

What is your point? How does this tie into active vs. passive management?