A new paper says that high CEO compensation and long-term company performance aren’t
necessarily aligned.
Time to grab the torches and pitchforks!
Okay, maybe we don’t storm the castle just yet, but Ric Marshall and Linda-Eling Lee
of MSCI ESG Research have published a paper titled “Are CEOs Paid for Performance?”
Spoiler alert: the answer seems to be “nope.”
The report focused on publicly-traded companies and stock performance.
Marshall and Lee looked at 10-year spans to see how CEO compensation impacts
long-term investments.
CEO compensation consists of lots of stuff, including a base salary, bonuses, travel budgets,
stocks and stock options.
The bulk of a chief executive’s pay comes
from those stocks and options,
not from a base salary.
And that sounds like it makes sense, right?
If you link a CEO’s compensation with stock value, then it stands to reason the CEO will
work hard to make certain the company does well.
In general, the better the company performs, the higher the stock price goes.
And that means more money for the head cheese!
But it turns out that doesn’t necessarily
amount to big gains for long-term investors.
Marshall and Lee examined 429 companies.
They divided the companies into peer groups and found the median CEO compensation
for each group.
Then they asked the question, “If I invested $100 in these companies 10 years ago,
how much would I have now?”
They found that companies that paid their
CEOs less
performed better in the long term.
Why is this? Part of the problem is that the average CEO tenure at large companies is 6.6 years.
So you could argue that there’s not enough incentive in place for CEOs to focus on long-term performance.
Another issue is how companies report and measure success.
Marshall and Lee argue that the annual reporting cycle encourages this obsession with short-term gains.
And while that might push stock values upwards in brief spurts, it could have a detrimental
effect in the long run. So is the answer to slash CEO compensation?
Marshall and Lee don’t go that far.
They argue that, instead, we should create new systems
to link CEO pay to long-term company performance.
That means the US Securities Exchange Commission would have to draft new disclosure requirements
to make companies fall in line. That’s a tall order.
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water,
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