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