Here’s a follow-up to yesterday’s post.
A Bloomberg article “Excessive CEO Pay for Dumb Luck” by Barry Ritholtz dated March 07, 2017 had claimed “CEO pay is rigged”.
One can only open one’s mouth in sheer horror when one reads that “the compensation packages of the chief executive officers of America have been rising faster than just about any rational metric upon which they are supposedly based”.
An Economic Policy Institute analysis had this to say: “CEO pay grew an astounding 943% over the past 37 years”.
EPI further observed this was a far faster growth rate than “the cost of living, the productivity of the economy, and the stock market”.
The above EPI statements already disproved the claim that CEO pay is reflective of a company’s performance.
What the article tells us is that CEO compensation isn’t the pay for performance its advocates claim. Instead, it is unmoored from any rational basis.
It is simply an inappropriate wealth transfer from shareholders to management.
You can place much of the blame on compensation consultants and the corporate boards that hire them. Boards are supposed to act on behalf of shareholders when they are considering the pay packages created by the former. But the relationships are riddled with conflicts that produced the charade we have today.
Compensation consultants created easily reached targets as a basis for so-called performance-based pay. But even that low bar has been bastardized.
It isn't merely the gluttony; rather, it’s the performance, or often the lack of it.
In the US of A, a great deal of information is being made available regarding this issue of managerial over-compensation. Thanks to one little-known aspect of the Dodd-Frank Act, this has made it easier to compare executive compensation against corporate stock returns.
I read that the results confirmed what some of us have long suspected:
The most overpaid CEOs actually destroy shareholder value.
To quote a Harvard Law School study:
“The 10 companies we identified as the most overpaid firms as a group underperformed the S&P 500 index by a gaping 10.5% and actually demolished shareholder value as a group with -5.7% financial returns” (Webpage
It seems that the reality is that shareholders are paying executives big bucks for simply keeping a chair warm during a bull market. That isn’t performance-based pay; it’s dumb-luck-based pay.
Kindly read this book, “Pay Without Performance: The Unfulfilled Promise of Executive Compensation” (Harvard University Press, 2004), authored by Lucian Bebchuk and Jesse Fried.
The book's thesis is that executive compensation practices benefit corporate executives at the expense of shareholders
through implicit and explicit corruption of the pay-setting process.
It argues that CEO employment contracts are bad for shareholders (not "optimal") because they are the product of managerial power.
Bebchuk and Fried argue that current executive pay practices are a sign of widespread corporate governance failures, a view that they believe to be supported by scholarly research on executive compensation.
I happen to support this belief.