Posts Tagged ‘Graef Crystal’

Highest-paid CEOs are mostly below-average CEOs

July 27, 2016

CEOpayvsstockholderreturenp1-by114-payper-16u-20160724183306

I always thought, based on long-ago conversations with compensation expert Graef Crystal, that the relationship between chief executive officer pay and corporate profitability was random.

But a new study indicates that there is a relationship—a negative one.  The higher-paid CEOs actually deliver less for stockholders than the lower-paid CEOs do.

What’s odd about this is that CEO compensation packages are structured so as to reward them for gains in stock prices.

It’s an example of Goodhart’s Law in operation.   All other things being equal, the rise and fall of a company’s stock price, relative to other companies in the same business, is a measure of how well a company is doing.  But there are ways for a CEO to manipulate the stock price that has nothing to do with company performance.

One is stock buy-backs.  These increase the price of the remaining shares.  But often the money might be better spent on making improvements in the company’s operation.

Another is layoffs or shifts to low-wage locations.  These immediately boost a company’s profitability by reducing the expense of wages.  But sometimes it costs the company in the long run to have the work done by workers who are low paid, but also less skilled, less well-trained and less loyal to the company.

All CEOs of big companies are well-paid—and should be.  Maybe what the chart tells us is that there are those who spend time negotiating or manipulating even higher pay that they should have spent tending to their businesses.

Maybe the best plan is to hire or promote a good person to be CEO, pay that person adequately and leave them alone.  A CEO who needs an extra incentive to do a good job shouldn’t be a CEO.

LINK

Highest-paid CEOs run worst-performing companies, research finds by Peter Yeung for The Independent (UK)

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.

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