Thursday, June 19, 2014

The higher the CEO pay, the worse the CEO performance

Corporations that pay CEOs more than $20 million a year lose an average $1.4 billion annually, according to Michael Cooper, professor of finance at the University of Utah’s David Eccles School of Business.

Vocativ reports the reason is that high CEO pay emboldens them in bad ways. "It can breed cocky executives who make poor business decisions, like over-investing in dodgy enterprises or agreeing to “value-destroying” mergers and acquisitions."

A good example is McKesson CEO John Hammergren. He received $51.7 million in 2013 after spending nearly $1 billion of the company's money on settling charges of cheating customers. McKesson is a Teamster employer accused of union-busting at its Lakeland, Fla., warehouse.

According to Vocativ,
A separate study found that as the clock begins to tick down on all those juicy incentives, CEO interest in the long-term performance of the company drops away. In the one-year period before stock options vest, CEOs tended to spend less on long-term investments and focus more on short-term gains, according to a report by professors at the University of Pennsylvania, Dartmouth College and the London Business School. 
The same study found that R&D spending declined by $1 million a year in 2,000 companies where CEOs were one year away from their vesting dates.
The problem, of course, is only getting worse as CEO pay continues to rise. The Economic Policy Institute recently reported average CEO compensation was $15.2 million in 2013, up 2.8 percent since 2012 and 21.7 percent since 2010. EPI also found:
From 1978 to 2013, CEO compensation, inflation-adjusted, increased 937 percent, a rise more than double stock market growth and substantially greater than the painfully slow 10.2 percent growth in a typical worker’s compensation over the same period. 
The CEO-to-worker compensation ratio was 20-to-1 in 1965 and 29.9-to-1 in 1978, grew to 122.6-to-1 in 1995, peaked at 383.4-to-1 in 2000, and was 295.9-to-1 in 2013, far higher than it was in the 1960s, 1970s, 1980s, or 1990s. 
If Facebook, which we exclude from our data due to its outlier high compensation numbers, were included in the sample, average CEO pay was $24.8 million in 2013, and the CEO-to-worker compensation ratio was 510.7-to-1.