Forbes | Across the board, the more CEOs get paid, the worse their companies do over the next three years, according to extensive new research.
This is true whether they’re CEOs at the highest end of the pay
spectrum or the lowest. “The more CEOs are paid, the worse the firm does
over the next three years, as far as stock performance and even
accounting performance,” says one of the authors of the study, Michael
Cooper of the University of Utah’s David Eccles School of Business.
The conventional wisdom among executive pay consultants, boards of
directors and investors is that CEOs make the best decisions for their
companies when they have the most skin in the game. That’s why big
chunks of the compensation packages for the highest-paid CEOs come in
the form of stock and stock options. Case in point: The world’s
top-earning CEO, Oracle billionaire Larry Ellison, took in $77 million
worth of stock-based compensation last year, according to The New York Times,
after refusing his performance bonus and accepting only $1 in salary
(he made a stunning total of $96 million in 2012). But does all that
stock motivate Ellison to make the best calls for his company?
The empirical evidence before fell on both sides of that question,
but those studies used small sample sizes. Now Cooper and two
professors, one at Purdue and the other at the University of Cambridge,
have studied a large data set of the 1,500 companies with the biggest
market caps, supplied by a firm called Execucomp. They also looked at
pay and company performance in three-year periods over a relatively long
time span, from 1994-2013, and compared what are known as firms’
“abnormal” performance, meaning a company’s revenues and profits as
compared with like companies in their fields. They were startled to find
that the more CEOs got paid, the worse their companies did.
Another counter-intuitive conclusion: The negative effect was most
pronounced in the 150 firms with the highest-paid CEOs. The finding is
especially surprising given the widespread notion that it’s worth it to
pay a premium to superstar CEOs like Jamie Dimon of JPMorgan Chase (who
earned $20 million in 2013) or Lloyd Blankfein ($28 million) of Goldman
Sachs. (The study doesn’t reveal individual results for them.) Though
Cooper concedes that there could be exceptions at specific companies
(the study didn’t measure individual firms), the study shows that as a
group, the companies run by the CEOS who were paid at the top 10% of the
scale, had the worst performance.
How much worse? The firms returned
10% less to their shareholders than did their industry peers.
The study
also clearly shows that at the high end, the more CEOs were paid, the
worse their companies did; it looked at the very top, the 5% of CEOs who
were the highest paid, and found that their companies did 15% worse, on
average, than their peers.
How could this be? In a word, overconfidence. CEOs who get paid huge
amounts tend to think less critically about their decisions. “They
ignore dis-confirming information and just think that they’re right,”
says Cooper. Fist tap Dale.
