Posts Tagged ‘Executive compensation’

Overall, CEOs don’t earn their big paychecks

April 14, 2014


The following is by Mark Symonds for Forbes

It isn’t every day that academic research comes along to tell you something you really wanted to hear and that you suspected was the truth all along.  In this case it’s about the long running debate around top executive pay.

A recent paper by J. Scott Armstrong of the Wharton School and Philippe Jacquart of France’s EMLYON, seem to have finally established that paying top dollar simply doesn’t get a better job done.  And, in fact, it might actually get a worse one done.

According to Armstrong and Jacquard, while there is plenty of evidence that financial incentives can be effective in motivating people to do mundane and boring tasks, individuals do the more interesting and challenging stuff…well, because it’s interesting and challenging.

Perversely, they say, very large financial incentives may actually hinder top performance. The paper argues there is strong evidence that individuals can become fixated on incentives and either become limited in their thinking, unable to digest and adopt new ideas or alternately become convinced that they will achieve the goal automatically so do not need to try as hard as they might otherwise.  Whatever the outcome, every other stakeholder from the more modestly earning employee to the corporate stockholder loses out.

And finally the research also suggests that we might not really be getting the brightest and best talent at the top because the tools and processes used to identify candidates are either limited or downright faulty

There is simply too much emphasis on past performance, personal recommendation, unstructured interviewing, an unwillingness to ask really difficult and searching questions and that more dangerous selection criterion of all – gut instinct. Worryingly, it seems that the headhunters and in-house recruiters charged with hiring occupants of the corner office may be relying too much on perception and too little on good, hard facts.

The paper points out that CEOs who win prestigious industry awards constantly out-earn those that don’t.  Yet the stocks of the companies the award winners head up consistently under-perform in comparison to those of their less publicity hungry peers.  Perhaps because the latter spend their time running their businesses well instead.  [snip]

Unlike many academics, who might shy away from coming up with a solution, EM Lyon’s Jacquart is one willing to give the obvious if uncomfortable answer – namely that current incentive models need to be abandoned and overall executive pay should be reduced.

And he’s also ready with a counter to those who will doubtless argue that this will make it impossible to recruit the right people and bring major banks and corporations crashing to the ground.

“Yes, of course this may make it more difficult to recruit very senior individuals from outside an organization, at least in the short term. However it would force businesses to focus more on the development of the talent it already has, the talent that is more likely to be more loyal to and understanding of its aims, goals and methodologies.”

via Big Company CEOs Just Aren’t Worth What We Pay Them.


CEO pay and stockholder return: the disconnect

May 24, 2013


I leave it to statisticians to tell me whether there is a relationship between the profitability of companies and CEO pay.  I just note that the CEO on this chart whose company was the most profitable, Jeff A. Stevens of Western Refining, got one of the smallest compensation packages, and the CEO with the biggest compensation package, Larry Ellison of Oracle, headed a company that lost money.

It is true, of course, that executive pay is related to the size of the company and other factors besides annual return on equity, so there may be other rankings in which these figures seem to make sense.  I’d be interested to know them.

Hat tip to occasional links and commentary.

Graef Crystal and the question of CEO pay

September 22, 2010

When I reported on business for the Democrat and Chronicle here in Rochester, N.Y., one of my favorite news sources was Graef Crystal.  He was one of the architects of the system of corporate compensation we have today – not just a salary, but the maze of incentive bonuses, stock options, pension benefits and other complexities that make it so difficult for the lay person to figure out what corporate executives actually get.

At some point Crystal stepped back from what he and his colleagues had done with a sort of “what have I done?” reaction – something like some of the scientists who worked on the Manhattan Project.  When I had contact with him, he had started a new career as a researcher, lecturer and writer on the abuses of corporate executive compensation.

Graef Crystal

What he concluded from his research is that there was no relation – not even a negative relation – between what CEOs and other corporate executives got, and the performance of their companies.  Some high-performing companies had high-paid CEOS and some had (relatively) low-paid CEOs; some low-performing companies had (relatively) low-paid CEOs and some had high-paid CEOs.  It was all random, he said.

As a reporter, I liked Crystal because he always gave me a pithy quote.  He once did a study comparing the compensation of British and American CEOs who headed comparable companies and delivered comparable results.  “You would always want to hire the Brits,” he said.  “They deliver the same results for less money.  And besides, they speak better English.”

In that era Eastman Kodak Co.’s board of directors in the 1990s replaced Kay R. Whitmore, the last of the CEOs to be promoted from within, with George Fisher, who was hired away from Motorola.  At the end of Fisher’s tenure, Crystal noted that in terms of return on investment to stockholders, Kodak actually performed better under Whitmore than under Fisher.  “You paid a Cadillac price for a Chevrolet,” he said, “and the Chevrolet turned out to be a lemon.”

Fisher, in addition to his multi-million-dollar salary, was given an “incentive bonus.”  In his first year, he received a “guaranteed incentive bonus.”  I asked a corporation compensation expert (not Crystal, I forget who it was) why somebody at that level needed an “incentive bonus.”  It seemed to me that most corporate executives had a good work ethic and didn’t – and shouldn’t – need to be bribed to do a good job.

The expert said the purpose of the incentive bonus was to remind the CEO of his priorities – which is not to create jobs, not to serve the community, but to deliver the maximum possible return to stockholders.