In olden times, that is to say pre-Internet, a businessman’s dream was to one day grow up to lead a company as President or CEO into a new era of growth and profitability. Well, not any more. Now, the dream is simply to become the CEO so that you can have an enormous, unchecked compensation package.
A new study jointly issued by professors at Harvard, Yale and INSEAD demonstrates that CEOs with the most outrageous compensation packages, relative to the other company executives, are associated with companies that under-perform.
What this should tell us is that while it is important to offer a competitive compensation package for CEOs, it needs to be in line with the overall compensation of the Company’s executive team.
The paper can be found here. The following is my summary:
- CEO pay, as a percentage of executive team pay, has been increasing over the last decade, both in salary and stock compensation.
- CEO pay is high when a CEO also chairs the board (they set their own pay package), and when few other executives are on the board (no one to stop it), and when the firm has more entrenching provisions. (ie- hard to get rid of the CEO)
- High CEO cost is associated with lower firm value.
- This high pay is associated with a less favorable market reaction, and a higher likelihood of a negative market reaction, to acquisitions announced by the firm.
- It is also associated with lower variability of stock returns over time.
Overall, our results indicate that the distribution of compensation in the top executive team is an aspect of pay arrangements and corporate governance that deserves researchers’ attention.
In summary, the outrageous CEO compensation is hurting shareholders, employees, and in general everyone except the CEO.