Skin in the Game Was a Good Idea
Welcome to issue #29 of The Davem Dish. Every week I share what actually works in investing based on my 20 years of wins, losses and expensive lessons. You’ll also get my thoughts on solopreneurship and life in general because the same principles apply — keep it simple, stay consistent and focus on what matters.
You’ve heard this one a thousand times. Invest in companies where management has skin in the game. Find the founder-led firms. Back the visionaries who eat their own cooking.
The logic is sound. A CEO with personal money on the line will protect shareholder wealth like it’s their own, because in a real sense, it is their own.
Then you look at how executives actually get paid in 2026, and the whole mantra starts falling apart.
Where the Idea Came From
The underlying problem was real to begin with. In the 1970s and early 1980s, executive compensation was overwhelmingly salary and bonus. A CEO’s pay barely moved when the stock moved. Whether the stock doubled or got cut in half, the CEO took home roughly the same paycheck. Research published in the Quarterly Journal of Economics in 1998 captured the scale of the disconnect. In 1980, a 10% change in a company’s stock price moved the CEO’s total pay by only about 12%. By 1994, the same 10% stock move shifted CEO pay by nearly 40%. The change came almost entirely from one source. Boards had started paying executives in stock and stock options instead of cash. The gap between what was good for shareholders and what was good for executives narrowed dramatically, and equity-based pay was the mechanism that closed it.
Buffett saw the misalignment early and started preaching the fix in the 1980s. His annual letters return to it again and again. Back companies where the people in charge are putting their own money where their mouth is. The value investing tradition built around him absorbed the idea as gospel. By the late 1990s and through the 2000s, “find managers with skin in the game” had become one of those mantras you’d hear everywhere and read in every Buffett-adjacent newsletter. The logic was simple. An executive paid only in cash has no reason to care about the stock price. One paid in equity has every reason to.
The mantra got fresh philosophical weight from Nassim Taleb’s 2018 book Skin in the Game: Hidden Asymmetries in Daily Life, which argued that decision-makers across every domain should bear real risk from their decisions. Taleb wasn’t writing a stock-picking guide. He was making a moral argument about who should carry consequences. The investing application was already three decades old by the time he wrote it, and his framing fit so naturally with what value investors had been saying that the two became hard to separate.
By the time Taleb’s book came out, the original problem had largely been fixed. Boards had spent thirty years rebuilding executive pay around stock and options. Within a decade or two, every public company had adopted the model.
What CEO Pay Actually Looks Like in 2026
Here’s the structure top to bottom. The Conference Board’s 2025 analysis put median Russell 3000 CEO compensation at $6.7 million, with $850,000 of that in salary and the rest dominated by stock awards and options. Performance-based stock awards at the Russell 3000 median came in at $3.3 million and stock options at $2.4 million, with options grants up 21% year over year while base salaries crept up just 3%. A separate AP and Equilar analysis of 344 S&P 500 CEOs put the S&P 500 median at $17.1 million in total pay against $1.3 million in salary, with stock awards alone running $10.2 million at the median and up almost 15% year over year.
The dollar amounts scale with company size but the structure does not. Salary makes up a small minority of total pay at every market cap, roughly 8% at the median S&P 500 company and closer to 13% at the median Russell 3000 company. The smaller end of the market is slightly more cash-heavy at the top, but only slightly. Equity dominates the structure everywhere.
The implication is straightforward. The problem that “skin in the game” was originally invented to fix has been engineered out of the system. Every CEO in the investable public market already has equity on the line. If the mantra worked as a stock-picking filter, you’d expect equity-heavy comp structures to predict outperformance. They don’t, because everyone has them. The fix became universal, and a universal filter filters nothing.
This is the pattern worth holding onto, because it shows up everywhere in investing. Every alignment mechanism that becomes universal stops aligning. The first companies to offer stock options had a real edge. By the time everyone offered them, the edge disappeared. The same logic applies to independent boards, audit committees, ESG disclosure, and almost every other governance reform of the last forty years. Each one solved a real problem when it was introduced. Each one then became standard enough to stop being a filter. Skin in the game is the most cited example because it sounds the most virtuous, but it’s the same pattern.
So when someone tells you to invest in companies where management has alignment through equity, the honest follow-up question is: which ones don’t?
The Real Alignment Mechanism
The skin in the game framework assumes CEOs are primarily money-motivated, and that the right amount of equity will buy you their attention and care. The framework misses who actually ends up running a Fortune 500 company.
The people who reach the CEO chair are not optimizing for the next $10 million. By the time someone runs a large-cap company, they already have generational wealth. The marginal compensation dollar doesn’t change their life. What changes their life is reputation, the next board seat, the prestige of running a company that wins, and standing inside their peer group of other CEOs and directors.
The traits that get someone into a CEO role — extreme ambition, competitive drive, need for recognition, willingness to put in 70-hour weeks for two decades to get there — produce people who cannot tolerate being seen to have failed. A CEO whose company underperforms doesn’t lose meaningful money. They lose status and perhaps the next, bigger opportunity. They lose the story they’ve been building about themselves their entire career.
That’s the alignment mechanism that actually does the work at the upper end of the market, and it runs independently of the equity grant. A Fortune 500 CEO with zero equity exposure would still try their damndest to make the company succeed, because failing in the role ends their career trajectory and threatens their identity. The equity is a sweetener.
The Visionary Founder Problem
The cousin mantra is “invest in founder-led companies,” and it travels well across market caps. At the large end, it survives on the back of about four names — Bezos, Zuckerberg, Musk, and Huang. Those four did enormous long-term work for shareholders, and they’re the names cited every time someone advocates the strategy. The harder question is what those four actually prove. They prove that being founder-led can produce extraordinary outcomes. They don’t prove that founder-leadership is the cause, or that picking founder-led companies as a class would have led you to them in advance. For every Bezos there’s an Adam Neumann. The trait is too common at the start and too rare at the finish to function as a filter.
A Bain study often cited in support of the strategy found that founder-led companies outperformed the index by a factor of 3.1x. That study, like nearly every founder-outperformance analysis you’ll see, has a survivorship problem. It captures the founders still standing at the time of measurement and quietly leaves out the ones that destroyed shareholder capital. Neumann walked away from WeWork with an exit package valued at up to $1.7 billion, on top of the roughly $700 million he’d already cashed out before the IPO through a mix of share sales and loans against his stock, while the company’s market value plummeted from roughly $47 billion to $8 billion. Elizabeth Holmes at Theranos, Travis Kalanick at Uber, Sam Bankman-Fried at FTX — every one of those founders had massive skin in the game, all of them wore the visionary halo, and every one of them burned shareholder money.
The micro-cap end of the market has its own version of this. Founder-CEOs with large personal stakes can absolutely build great compounders, and any reader who hunts in the small-cap universe has probably seen a few. They’ve also seen the other kind — the founder-CEO whose 25% ownership stake somehow correlates with declining margins, and a refusal to ever take outside advice. The personal stake didn’t prevent the value destruction. In some cases it enabled it, because nobody in the building had the standing to push back.
The pattern with charismatic founders, at any market cap, is that the same traits that build a multibillion-dollar valuation — conviction, control, contempt for conventional wisdom — are the traits that erase shareholder value when the business model can’t support the story. Investors mistake confidence for competence and vision for viability.
What’s Actually Keeping CEOs Honest
There’s also a backstop at the upper end of the market that has gotten much more aggressive in the last few years. If a large-cap company underperforms for any sustained period, an activist shows up. That used to be rare but now it’s routine.
Activist investors launched 255 campaigns globally in 2025 according to Barclays, a record. Elliott Investment Management alone ran 18 of them, deploying close to $20 billion of capital and securing 17 board seats. Their targets included Lululemon, Lyft, PepsiCo, Yeti, Barrick Mining, and Phillips 66 — none of them obscure small caps. A record 32 CEOs stepped down within a year of an activist campaign in 2025. Push-to-sell demands hit a five-year high, according to a separate Diligent Market Intelligence report, with over 70 U.S.-based companies facing activist pressure to pursue strategic transactions.
What activists actually threaten is reputational, not financial. The ousted CEO doesn’t lose meaningful money. They lose the next board seat or the next operating role, and everyone in their peer group knows why. That’s the punishment that produces the discipline “skin in the game” was supposed to produce through equity. The equity didn’t keep them honest. The career trajectory did.
This safety net operates mostly in large-cap and upper-mid-cap territory by dollar volume, but it has been moving down-market. First-time and lesser-known activists started launching more campaigns against smaller-cap companies in 2025, with institutional investors and proxy advisors like ISS and Glass Lewis backing them. If you own large caps, the alignment problem gets resolved externally, and often faster than any equity grant could produce internally. If you own mid caps, the same mechanism applies in a thinner form. If you own micro caps, you’re largely on your own, which makes the quality of the underlying business numbers more important, not less.
What to Look at Instead
The reason skin in the game caught on as a heuristic is that it offered a shortcut. Read the proxy, see how much equity management owns, and feel like you’ve done due diligence. Process-driven investing doesn’t work that way. The questions that actually predict whether a business will compound capital over the next decade have very little to do with how the CEO is paid, and they apply equally to a $300 million micro cap and a $300 billion large cap.
Look at whether earnings are growing, whether sales are tracking alongside them, whether free cash flow is expanding, whether return on equity and return on invested capital are strong and stable, and whether margins are moving in the right direction. Those patterns are visible on any financial website and remain stable across management changes. They don’t ask you to evaluate someone’s character, vision, or charisma. They ask you to evaluate the business.
The mantra had its moment. It belonged to an era when boards underpaid executives in equity and ignored shareholder returns, and that era ended decades ago. What’s left is a phrase that sounds wise but tells you almost nothing about whether a stock will work.
The deeper problem with the mantra was always that it gave investors a way to evaluate CEOs without actually evaluating anything. Read the proxy, count the shares, move on. The work of figuring out whether a business is actually compounding capital is harder, slower, and less satisfying.
It’s also the only work that pays.
Follow patterns, not predictions, and definitely not proxy statements.
Cheers,
Andrew
What’s your take? Has the “skin in the game” framing ever actually helped you avoid a bad stock or pick a good one? Or has it functioned more like a vibe check? Leave a comment and let me know.
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The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.