The AFL-CIO reported recently that CEOs in the S&P 500 stock index are paid 331 times what the average worker is. Now a comprehensive university study provides evidence that higher paid CEOs often do worse for their companies in key areas. So not only are CEOs paid millions more than most mere mortals but they are also underperforming for the companies that hire them. The study by the David Eccles School of Business at the University of Utah used a larger data sample (1,500 big cap companies) than past efforts to track CEO pay to overall performance.
Specifically, the study discovered that the highest paid CEOs earn significantly lower stock returns for up to three years. Additionally, CEOs with an average compensation of more than $20 million are linked to an average yearly loss of $1.4 billion for their organizations.
The study didn’t feature the performance of individual firms, but a list compiled by the Wall Street Journal (available here) shows the highest paid CEOs and their company’s ranking. In 2013 the top twenties compensation spanned just over $75 million to a paltry $22.4 million. None of the top ten in CEO pay are in the top ten percent for business performance. And the highest paid CEO’s corporation is ranked no.152 for performance.
A link between higher executive pay and more overconfident behavior in making decisions was also shown in the study. Overconfidence leads to increasingly risky aggressive mergers, acquisitions, bad projects, and wasteful corporate spending. The study’s author gently offers this caution:
“[…] this study doesn’t prove that increased pay is necessarily bad, it does show there is a link between increased pay and decreased financial performance.”
You know regularly overpaying CEOs by many gazillions of dollars isn’t necessarily the problem or even bad but … The study suggests an obvious solution – reexamining the methods used to determine executive pay and incentives for maximize performance.
Will we see pay-cuts, haircuts, and smaller compensation deals at the top? Wouldn’t bet on it.