Are top CEOs worth their eye-popping pay? New report says no.
A decade-long analysis of executive compensation has found that the highest paid chief executive officers do the worst job in driving the stock performance of their companies.
In a report released Monday, Boston market-research firm MSCI, which studied 429 large US companies over a 10-year period that ended in 2015, found that average returns for shareholders were 39 percent 20 percent of executive earners than in the top 20 percent, as CNN reported.
鈥淓ven after adjusting for company size and sector, companies with lower total summary CEO pay levels more consistently displayed higher long-term investment returns,鈥� .
At a time of heated national debate about growing wealth inequality and excessive executive compensation, the report's authors call for executive pay to be better-aligned with performance.聽They also call into question the view among corporations that generous pay packages, particularly the huge stock incentives, help recruit celebrity-level talent and drive company performance.
鈥淭he highest paid had the worst performance by a significant margin,鈥� Ric Marshall, a senior corporate governance researcher at MSCI, told The Wall Street Journal. 鈥淚t just argues for the 聽to be more conservative.鈥�
American's highest-paid CEOs earn an聽,聽including salary, cash bonuses, equity, and other benefits, according to executive data from research firm Equilar.
The practice of offering this colossal compensation started to take root a few decades ago, though companies began adding the equity incentive to CEO packages after the 2008 financial crisis, when stock prices were low, reports CNBC.
鈥淲e haven鈥檛 always given so much credit to business leaders,鈥� as Nancy F. Koehn, a historian at the Harvard Business School (HBS), noted in The Washington Post in 2014.
鈥淔rench economist Thomas Piketty argues in his new book, 鈥楥apital in the Twenty-First Century,鈥� that sometime after 1970, society became more tolerant of once unacceptably high levels of executive pay, because American culture 鈥� and senior executives and corporate boards in particular 鈥� or super-merit for a small number of powerful leaders, including athletes, celebrities and chief executives,鈥� she writes.
Among the business celebrities whose names became synonymous with those of their companies, and who have been heralded as gurus and heroes, are former聽General Electric CEO聽Jack Welch and Apple鈥檚 former chief executive Steve Jobs.
鈥淪uch lionization is misplaced,鈥� concludes Prof. Koehn. 鈥淥perating a sustainable enterprise, as any executive, manager or employee knows well, is inherently a team sport.鈥�
In 1990, the equity-based share of total compensation for senior managers of US corporations was only 20 percent, according to Mihir A. Desai, a professor of finance at Harvard Business School. Today, it鈥檚 upwards of 70 percent, reports MSCI.
鈥淭his transformation would be welcome if it served to structure incentives and rewards appropriately鈥攊ndeed, ,鈥� wrote Prof. Desai in the Harvard Business Review in 2012.
鈥淯nfortunately, the idea of market-based compensation is both remarkably alluring and deeply flawed. The result has been the creation of perhaps the largest and most pernicious bubble of all: a giant financial-incentive bubble,鈥� he suggests.
MSCI researchers recommend more transparency of pay in corporations鈥� annual financial disclosures. There has been some progress in this area: In 2015, the Securities and Exchange Commission (SEC) approved a rule requiring that companies make public the pay gap between top executives and rank-and-file employees. Before that, the 2010 Dodd-Frank financial reform law that came in the wake of the 2008 financial crisis required聽public companies to hold advisory shareholder votes on executive compensation every three years, though those aren't binding.聽
The authors write that the SEC should also require disclosure of cumulative incentive pay over long periods, to help connect a CEO鈥檚 pay with longer-term performance, instead of focusing on the short term.
鈥淐loser scrutiny of the relationship between CEO pay and performance over longer time periods could lead to different conclusions,鈥� suggest report authors.
