Big Bucks for CEOs Doesn't Mean Better Company Performance

Big Bucks for CEOs Doesn't Mean Better Company Performance HowStuffWorks Big Bucks for CEOs Doesn't Mean Better Company Performance HowStuffWorks
Big Bucks for CEOs Doesn't Mean Better Company Performance HowStuffWorks

Paying your CEO the big bucks doesn't translate into overall success for the company, according to a recent report from MSCI, a research firm that caters to institutional investors. That report agrees with previous studies, but while earlier research focused on short-term performance compared to CEO compensation, this new report is all about the long play.

Of course, CEO compensation includes a lot more than just a base salary. There are bonuses, travel budgets and other components as well. But two of the biggest puzzle pieces are stocks and stock options. According to the report, those two pieces make up about 70 percent or more of the average CEO's pay.

And by long-term performance, the authors mean a 10-year time span. They asked the question, "If you were to invest $100 in stock in one of these companies, how much would you make after 10 years?" They wanted to explore the relationship between CEO pay and a long-term investment.

Since company performance is one of the big influencers of stock prices (along with industry analyst reports and voodoo), it stands to reason that a CEO would want his or her respective company to do well. After all, that's where the bulk of the paycheck is coming from. But the report's authors argue that too much focus is placed on short-term gains over long-term effects. What might provide a nice, hefty boost in stock price over the course of a few months might have negative effects years down the line.

To complicate matters, the analysts found that the average tenure for a CEO at the head of a mid-size to large company is 6.6 years. A long-term investor is likely to see at least two CEOs in a decade (or more in some cases — Yahoo went through five CEOs in five years).

As part of the study, the analysts took more than 400 companies, grouped them by peer groups and determined the median CEO compensation: $18.4 million was the median realized pay that the CEOs of those 400-plus companies took home in 2014, while $12.5 million was the median summary pay, or amount intended to "incentivize future performance."

They found that if you had invested $100 in one of the companies that paid CEOs above the $12.5 million median, your payout would be about $265. But if you had invested in a company that paid its CEO below the median, the payout was $367.

We'd have to take other factors into consideration before we could definitively state that the more a company pays its CEO, the worse it will perform over the long run. But the study authors have some suggestions for turning things around. Chief among them is to link a CEO's compensation not to annual or quarterly results but rather to long-term performance. Another is to change the emphasis on annual company reports.

Ideally, if we see a change it will mean CEOs will be careful to make decisions that are good for the long-term health of a company. And it will mean that you could invest in a company you believe in for the long haul and not worry that a string of CEOs will make the stock price jump all over the place. Or it might mean you should become a CEO really soon before companies get wise and start cutting compensation packages.