What a surprise- NOT!
I’ve said for years that the bloated, sky-high compensation proffered to corporate executives, the CEO pay, has nothing to do with corporate performance. OK. I apologize. I have been wrong.
Yup. It turns out that the more the CEO gets paid- the worse the company performs!!!!! (Heh, heh, heh!) (OK. The top 10% did do SLIGHTLY better than the rest; the bottom 10% also did slightly worse than the rest- as you can see from the graph below. Oh, and the top 20%- and the bottom 20% performers- paid their CEO’s some $10 million more than the rest of the pack.)
According to a report from MSCI and the Executive Director of its Environmental, Social, and Governance Research unit, that’s the facts. They examined the 10 year (2006 through 2015) market returns for 423 public US companies and their compensation systems for their CEOs. The study assumed that all dividends were reinvested into the company’s stock, to “maximize” any gains the firm would provide the stockholder. And, since many firms had more than 1 CEO during this period, the study examines the overall performance of CEOs and the companies- not any individual CEO itself.
Folks like me recognize that the compensation system rewards executives who finagle short-term results, who employ annual surveys of what other CEO’s receive (which continually ramps up pay for each executive). The other (wrong) side claimed this ensured the CEO’s aligned their interests with the stockholders. (But, as I’ve also said, most corporations do not truly care what stockholders say or want, unless those stockholders are hedge funds or venture-equity efforts, that can force the boards to bend to their will. Stockholders don’t get to vote on pay or CEO selection- ever.)
Not surprising (given what I wrote in the above paragraph), performance of a 3 or 5 year period did correlate well with executive pay. (More than half of CEO compensation, typically 60-70%) is derived from stock options of the issuance of restricted shares; these are awarded annually or on a three year basis.) Proof further that only short-term considerations play in the minds of those CEO’s who get rewarded for stock performance.
Shifting the term of examination by 1 year didn’t change the overall results- but it did depict other companies paying dearly for poor performance.
Maybe it’s time we paid the true champions of corporate performance what they are worth- the employees!
Thanks Roy for your post. A subject that we can discuss forever!
One I hope we don’t have to, Gaetane!
I have to agree with you here. Then there are those fat bonuses when the corporate crooks have to resign. Equifax is a prime example. The one responsible for the company because he was head honcho gets to leave with a bonus that would do a lot toward helping those whose information was stolen repair their credit. I hope he has to spend it all on legal fees.
Barbara Radisavljevic recently posted..Meet Vincent Bernardy: Musician, Painter, and Artistic Recycler
I would prefer a clawback, and sharing those funds with the employees, Barbara.
I agree – and super interesting to see the stats on this kind of stuff. This is part of the reason I became an entreprenuer. I don’t want a cap on my income potential!
Emily Muia recently posted..Three Things Every Network Marketer Should Know
I’m with you, Emily. Although I was on my way to being one if those execs (except my attitude and views would certainly clash with theirs).
Yep, I agree. The people who do the work and who come up with the ideas should be compensated better.
That might have happened sooner, but TheDonald killed the rule demanding the reporting of executive pay as a multiple of average pay (and other such statistics).
Well, I was never a a CEO and the whole time I worked as an addictions therapist for the city of Portsmouth (VA), I never even met the bigwigs. And we most definitely weren’t paid for performance. OTOH, we got raises every year no matter what. Gotta admit, I didn’t complain,
Your raise – times ten (or more)- was more in line with the gain proffered to those execs, Jeanine.
Great content. Thanks for sharing insightful information on the rights. Here I am having one basic question../….
And that question would be….?
It really doesn’t surprise me that the more they’re paid the worse the company performs – focus on short term goals is what kills a company in the long run.
Amazing how it’s the entrepreneur and small business executive who gets that,Megan!
I’ve always wondered why the employees who do the work to get the executivea where they are, don’t get higher wages.
Martha recently posted..Easy to Make Fruit Smoothies
FI wish I still wondered, Nartha. It is simply greed.