Two recent studies are adding to the debate on CEO compensation and suggest that high CEO pay can negatively affect firm value and shareholder returns.
Read Jason Zweig analysis in the Wall Street Journal, Does Golden Pay for the CEOs Sink Stocks?
The study conclusions are summarized below, together with direct links to each.
The CEO Pay Slice
This study - by Lucian A. Bebchuk (Harvard Law School), Martijn Cremers (Yale School of Management) and Urs Peyer (Insead) - investigates the relationship between the CEO Pay Slice (CPS) – the fraction of the aggregate compensation of the top-five executive team captured by the CEO – and the value, performance, and behavior of public firms. The CPS “may reflect the relative importance of the CEO as well as the extent to which the CEO is able to extracts rents”.
Their conclusion is that CPS is negatively associated with firm value. Most particularly that “CPS is correlated with (i) lower (industry-adjusted) accounting profitability, (ii) lower stock returns accompanying acquisitions announced by the firm and higher likelihood of a negative stock return accompanying such announcements, (iii) higher odds of the CEO’s receiving a “lucky” option grant at the lowest price of the month, (iv) greater tendency to reward the CEO for luck due to positive industry-wide shocks, (v) lower performance sensitivity of CEO turnover, (vi) lower firm-specific variability of stock returns over time, and (vii) lower stock market returns accompanying the filing of proxy statements for periods where CPS increases.” Read the Study.
Performance for pay? The relationship between CEO incentive compensation and future stock price performance
This study by Michael J. Cooper (University of Utah) and Huseylin Gulen and P. Raghavendra Rau, both from Purdue University, found evidence that industry and size adjusted CEO pay is negatively related to future shareholder wealth changes for periods up to five years after sorting on pay. For example, firms “that pay their CEOs in the top ten percent of pay earn negative abnormal returns over the next five years of approximately -13%. The effect is stronger for CEOs who receive higher incentive pay relative to their peers. Our results are consistent with high-pay induced CEO overconfidence and investor overreaction towards firms with high paid CEOs.” Read the Study.
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Posted by: labatterie | January 10, 2011 at 04:34 AM
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Posted by: ordinateur pc portable | January 10, 2011 at 04:31 AM
I work for GE, but not at this level of compensation. I'm going to share this info. with my Director and see his reaction. Very interesting if your facts are accurate.
Posted by: Oxy | August 13, 2010 at 08:25 AM
Thanks for the review. It’s very informative.
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Posted by: Leilani | February 04, 2010 at 11:23 AM