Higher Pay For Underperformance

Posted October 3, 2016

With the recent focus on executive pay, especially at many of the drug companies, and the political discourse on the topic, we thought a Forbes article on the subject came to some interesting conclusions.

It would seem obvious that companies that do well—enjoy better profits and deliver higher returns to their shareholders—would pay their CEOs more, while companies that didn’t fare as well would pay less.

It would also be wrong.

A study by MSCI’s corporate governance research group has found that companies that paid their CEOs above the median for all comparable CEOs performed less well than those who compensated their CEOs at or below the median.  Looking at 10 years of data for more than 800 CEOs at 429 large public companies, the group found that $100 invested in the 20% of companies that paid their CEOs the most yielded a total dollar value of $264.76 between 2006 and 2015.  If you put the same $100 in the 20% of companies that paid their CEOs the least, you would have ended up with $367.17.  These results include both capital gains (movements in the share price) and dividends.

The researchers concluded that the higher-compensated executives might be focusing more of their attention on short-term rather than long-term results.  They argue that it’s time to rethink and restructure CEO compensation—and perhaps recognize that the people at the top are not quite as important as they (and their hand-picked compensation committee) think they are.



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