Study Shows CEOs with Highest Salaries Lead Lowest Performing Companies

July 28, 2016

For years, CEOs at large corporations have attracted the public’s anger due to the exorbitant salaries that many executives earn. Companies counter these complaints by explaining that high-level employees only make their millions if they perform well on the job. After all, the stock options and bonuses that often form the bulk of CEO pay only become available once the company clears a certain set of financial benchmarks. This supposedly gives executives more incentive to do a good job since it can lead to larger rewards down the line.

According to a new study by the corporate governance-research firm MSCI, however, this system might not be as sound as some CEOs suggest. The organization analyzed the pay of 800 CEOs at more than 400 large and midsize companies over the course of a ten-year period ending in 2014. Researchers then compared those numbers to the total return earned by shareholders over the same period. The study found that a $100 investment in companies with the highest paid CEOs would yield a return of $265 after a decade. In contrast, investing the same amount in companies with the lowest paid CEOs would result in a $367 return.

These findings appear to contradict the notion that companies perform better if they provide benchmark incentives for executives. “The highest paid had the worst performance by a significant margin,” said MSCI senior researcher Ric Marshall. “It just argues for the equity portion of CEO pay to be more conservative.” The study also suggests that executives aren’t able to focus on the long term since so much importance is placed on annual pay reviews. These yearly evaluations can possibly encourage CEOs to make rash decisions in order to seem more involved and effective. In its report MSCI suggested that the SEC require companies to disclose all incentives in order to provide a clearer picture of a CEO’s salary relative to their long-term performance.

 

Questions:

  1. Is it ethical for CEOs at large companies to earn multi-million dollar salaries? 
  1. Should companies be more transparent about how they compensate their executives?

 

Source: Theo Francis, “Best-Paid CEOs Run Some of Worst-Performing Companies,” The Wall Street Journal, July 25, 2016. Photo by Pictures of Money.

 

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