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The Highest-Paid CEOs Are The Worst Performers, New Study Says

260 points by dbingham 12y ago

mantraxB 12y ago
> "The more CEOs are paid, the worse the firm does over the next three years, as far as stock performance and even accounting performance" Yeah well this entire study is invalidated by using stock performance as the lazy way to measure CEO performance. Expensive CEOs are typically expensive, because they're hired to fix a company that everyone knows is going down. The riskier the company, the more the stock is expected to go worthless, the more you get paid in cash for taking on the job. So it's expected that if you look for expensive CEOs you'll be seeing stock/accounting performance going down in short to mid term, because recoveries, whether successful or not, take time. They take years. Also are you honestly counting CEOs who get millions in stock and $1 pay as... just getting $1 in pay? How stupid are you.
- JacobJans 12y ago
  > Also are you honestly counting CEOs who get millions in stock and $1 pay as... just getting $1 in pay? How stupid are you. That's not what's implied by the article: "big chunks of the compensation packages for the highest-paid CEOs come in the form of stock and stock options." Edit: From the paper.... "To better understand the drivers of the pay effect, we decompose pay into its major components. We find that most pay components are negatively related to future abnormal returns earned by these firms, with the strongest components being the value of options granted and long-term incentive payouts. However when we add other control variables that have been shown to explain the cross-section of returns, the components largely lose their significance, with the exception of the value of options granted, which emerges as the main driver of the pay effect."
- Permit 12y ago
  >Also are you honestly counting CEOs who get millions in stock and $1 pay as... just getting $1 in pay? How stupid are you. No. And neither did the study.[1] >We use three measures of compensation: (i) total compensation (TDC1) which includes salary, bonus, total value of restricted stock granted, total value of stock options granted (using Black Scholes), and long term incentive payouts, (ii) total cash compensation (TCC) which includes salary and bonus, and (iii) the difference between total compensation and total cash compensation (TDC1-TCC) which is meant to capture the options and incentive components of total compensation. This difference, which we call incentive compensation, is our primary variable of interest, including restricted stock grants, option grants, long term incentive payouts, and other annual noncash compensation. [1] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1572085 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1572085
- mikeryan 12y ago
  The study was explicitly looking for a correlation between stock performance and CEO compensation, the compensation included bonuses and stock/options. I'm not sure stock performance is necessarily a lazy indicator. Considering that Company Board's hire CEO's pretty much entirely on how well they can move this needle.
- michaelkeenan 12y ago
  Future expectations about stocks affect their price today. If a company is known to be in trouble, its shares will already be cheap. (A few people, most notably Warren Buffett, can reasonably disagree with this, because they're already very rich from beating the market. Everyone else should just assume that Warren Buffett has already traded the share down to its appropriate price.) I suspect that the overconfidence explanation given in the article is closer to the right explanation. I was suspicious at first, but then the article gave figures about mergers. It's widely known that mergers usually don't meet expectations, so maybe overconfidence would lead a CEO to think they could escape this statistical fate.
- josu 12y ago
  I can't agree with you more. This would have been a nice study if it didn't reach any conclusions; just laid the data, pointed out all the possible reasons why their analysis could be wrong and paved the way for a better study. One example, their data only covers from 1994 to 2011. PS: Direct link to the study http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1572085 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1572085
  - ceejayoz 12y ago
    The standard format for a scientific paper includes a discussion section, where you're supposed to draw such conclusions and interpret the results and their significance.
    - josu 12y ago
      Then this document should not be called a "scientific paper" or/and should never be published.
      - ceejayoz 12y ago
        Sorry, what? It shouldn't be called a scientific paper because it follows the standard format for one?
  - CatMtKing 12y ago
    Then it wouldn't be a study; it would be data collection.
    - josu 12y ago
      I'm ok with that. But I guess that "data collection" documents don't count towards academia points.
      - CatMtKing 12y ago
        Sort of like: Here's the data. Analysis is an exercise left to the reader? I guess what I'm trying to point out here is that while collecting data does take up most of the bulk of the work, data is meaningless without analysis and direction to inform further gathering. That's why the field of study called statistics exists. It's not just about academia points. On the same vein, the reader should be critical of the analysis; it should not be taken as accepted truth. And the writer should try to predict and address criticisms.
balls187 12y ago
Interestingly, Peter Thiel wrote that Startup success is correlated with CEO pay (or the lack there-of) http://techcrunch.com/2008/09/08/peter-thiel-best-predictor-of-startup-success-is-low-ceo-pay/ http://techcrunch.com/2008/09/08/peter-thiel-best-predictor-...
- sparkzilla 12y ago
  Thiel's idea is fine if you're a kid eating ramen and living with your parents, but it is completely wrong for people who already have experience, and/or have families to support. I actually lost an investment because the investor thought I should not pay myself at all while trying to build the business.
  - 31reasons 12y ago
    >>I actually lost an investment because the investor thought I should not pay myself at all while trying to build the business. That is absurd, they don't deserve to be investors. You receive money in exchange for equity. The money is used to run the company and build value for the investors. Providing salary to everyone who is engaged in building value must be part of the equation. Otherwise if you think about it, in extreme case you will give away your entire company to build value for investors and you will get nothing in the end.
    - sparkzilla 12y ago
      Tell me about it. He actually said to me that instead of making an investment, he should own the company and would just pay me a salary to build the business. I respectfully declined.
  - balls187 12y ago
    You're a founder, so none of this should be shocking, early stage startups are cash strapped, and cash-in-the-bank is the 2nd most valuable commodity a company has, after it's people. In fact, the #1 reasons startup's will fail, will because they run out of money. Thus, a CEO who doesn't treat their cash as the valuable resource it is, is just putting an unnecessary burden on their company. Peter Thiel isn't advocating paying yourself nothing. His point (and data[1] backs this up), that CEO's making a high salary is a pretty good indicator of Startup that will fail. If you need a high salary, then being a Founder/CEO probably isn't the right move. You're putting a burden on the company because of your life style choices. Conversely, if you don't pay yourself anything, you're going to spend too much time dealing with the pain of not making ends meet, instead spending your energy growing your company. [1] http://blog.startupcompass.co/73-percent-of-startup-founders-make-50-dollars-000-per-year-or-less http://blog.startupcompass.co/73-percent-of-startup-founders...
malandrew 12y ago
I'm really curious about the relationship of CEO compensation and employee satisfaction/morale in companies. I have lost count of the number of times I've heard about a CEO, COO or CFO getting 8 figure salaries while the rank and file employees had to forego their bonuses in a touch year. I cannot begin to imagine how devastating that knowledge is to employee morale.
- nyrina 12y ago
  The best I remember is that a Danish bank (I think it was "Nordea" or "Danske Bank", but I'm not sure and my search-karma seems to have gone for the day) had a CEO who got a huge bonus for meeting his goals in making a profit back in 2009 or 2010. The way he did that, though, was to fire 30% of the staff (and branches) and living off the profit from the hard work those 30% did the previous years - the next years they had bigger and bigger deficits, because they couldn't keep living off previous years loans.
- sirkneeland 12y ago
  I went through it last year. Our company didn't make money so no bonuses for us while the CEO got a handsome package of some $25 million. It's pretty terrible to go through. Even if you didn't think the CEO has done a terrible job (I officially have no comment on the matter), it was still terrible.
endlessvoid94 12y ago
It's naive to not pay yourself a reasonable salary once you can afford to. One of the biggest regrets of failed first-time CEOs is that they didn't pay themselves enough.
- _delirium 12y ago
  This is studying CEOs of large companies, not startup founders who hire themselves as CEOs and set their own salary.
- dubcanada 12y ago
  A reasonable salary is not $28 million a year.
  - marknutter 12y ago
    It is if you're in high demand. LeBron James, for instance, earns $19MM per year and generates far more than that in revenues for the Miami Heat and NBA.
    - smacktoward 12y ago
      The NBA also has a salary cap for players: http://en.wikipedia.org/wiki/NBA_salary_cap http://en.wikipedia.org/wiki/NBA_salary_cap A salary cap for CEOs would be an interesting experiment.
      - fallse7en 12y ago
        But whereas the NBA can enforce a salary cap for its players, who would enforce the salary cap for CEOs?
        Crito 12y ago
        Shareholders presumably, if they cared to.
        venomsnake 12y ago
JacobJans 12y ago
I think this is the most interesting excerpt from the study: "The level of incentive compensation is significantly negatively related to the forward ROA, while the level of cash compensation is positively related to the level of ROA. Overall, we conclude that our results seem most consistent with the hypothesis that overconfident CEOs accept large amounts of incentive pay and consequently engage in value destroying activities that translate into future reductions in returns and firm performance. "
- tjradcliffe 12y ago
  I wonder about that "overconfident" label, and it might be possible to tease various effects out of the data. Consider two possibilities: 1) CEOs with large incentive pay are irrationally confident in the success of risky policies 2) CEOs with large incentive pay are behaving like economically rational agents... betting someone else's money. That is, incentive pay is more like a free pass to a casino where your losses are made good but you keep some fraction of your winnings. Under those circumstances taking large risks may be the most rational thing to do, IF the cash component of the CEO's compensation is sufficient to keep them in caviar and summer homes while they gamble the firm's money away.
  - camelite 12y ago
    Your second possibility covers not only executives who partake in high-risk gambles but also executives who deliberately bankrupt their company for personal profit. A canny executive doesn't rob the firm by dipping his fingers in the till but by, for instance, loading the firm with gold-plated rubbish and extracting a personal profit in the form of compensation, stock-options etc, before the sheen wears off.
- cbsmith 12y ago
  Small problem: the incentive compensation is mostly options, and the way that package is measured is based on the value of the options at that moment in time. Options with high valuations are effectively pay for past performance that is consequently now worth something.
highace 12y ago
...but the best negotiators, evidently.
squozzer 12y ago
The article merely scratches the surface. We can probably agree that corporations have certain structural flaws, but I doubt making a CEOs life more burdensome - who would take the job under a claw-back regime without some kind of financial protection? - will improve the picture. One line of inspiration come from government - maybe a bicameral board - one for managing quarterlies, the other for longer horizons - might fix some issues. Another might be to limit cronyism - boards seats given to CEO appointees, or limiting the number of board seats a person can hold.
marknutter 12y ago
"The Highest-Paid CEOs Are The Worst Performers, New Study <Which Is in Line with People's Assumptions> Says"
- skndr 12y ago
  This is a Common Sense Fallacy[0]. Playing devil's advocate, the result could have been that CEO pay was very well correlated with performance. The company doing well can justify a higher compensation. Of course, this is probably the argument that gets used. [0] http://corkskeptics.org/2011/05/03/the-common-sense-fallacy/ http://corkskeptics.org/2011/05/03/the-common-sense-fallacy/
reversiontomean 12y ago
Is it possible that what we're seeing here is a reversion to the mean[1] - CEOs who do particularly well some years get large pay packages, and then when their performance reverts to the mean in subsequent years they end up overpaid relative to performance? [1] Thinking, Fast and Slow by Daniel Kahneman
- gojomo 12y ago
  Probably! Also perhaps, Winner's Curse: those who've paid the most in a competitive process are most often those who overestimated the value received. http://en.wikipedia.org/wiki/Winner%27s_curse http://en.wikipedia.org/wiki/Winner%27s_curse And Tournament Theory: compensation is often based not on proportionate productivity, but rank order, which may be easier to measure, and serves as probabilistic-motivation for other workers competing for the top spot. http://en.wikipedia.org/wiki/Tournament_theory http://en.wikipedia.org/wiki/Tournament_theory
- mtdewcmu 12y ago
  You beat me to it. Another way to state it would be that having a richly-paid CEO is a lagging indicator; or the companies with the resources to have a trophy CEO are likely already topped out and running up against the law of large numbers. Imagine being Tim Cook, CEO of Apple: he ought to expect high pay for such a prestigious job (I haven't looked it up), but continuing to grow the stock price at past rates would be next to impossible.
  - jsw97 12y ago
    Yes, but they are not comparing future performance to past performance, but rather to that of similar firms.
    - mtdewcmu 12y ago
      I'm sure they ruled out the more obvious confounding variables. All else being equal, you would expect a result like they got, based on the null hypothesis that expensive CEOs are at least average among CEOs, combined with the suspicion that their hiring is not a random event. Factor in that the researchers were undoubtedly biased in favor of the outcome they found, and a lot of skepticism is justified in making sense of this.
bunderbunder 12y ago
There's an interesting psychological phenomenon I've read about where if you offer someone a material reward in return for doing a job, it tends to make them enjoy the job less. In extreme cases, you can take something that a person really loves to do and make it feel like a burdensome chore for them, simply by saying, "I'll give you $X to do Y". I wonder if this story could have something to do with that.
- GregBuchholz 12y ago
  You might enjoy "Drive: The Surprising Truth About What Motivates Us", which explores the research on that topic. http://www.danpink.com/books/drive http://www.danpink.com/books/drive
- epaladin 12y ago
  I think it has to do with intrinsic vs extrinsic motivation[1]. I'd be a lot happier if I didn't need to get paid for work- as soon as money is involved, my intrinsic drive/interest tends to evaporate and gets replaced with anxiety. I'm definitely a fan of basic income for that reason- the ability to create things\help people without having to be concerned about income so much. If additional income results from that, great! If not, oh well, there were likely still other benefits garnered from the experience. [1]Self-Determination Theory: http://en.wikipedia.org/wiki/Self-determination_theory http://en.wikipedia.org/wiki/Self-determination_theory
- njharman 12y ago
  I've seen this firsthand with artists and commissions.
carsongross 12y ago
The conflict-of-interest and self-dealing problems at the c-suite and board level are absolutely pervasive at this point. I don't think much will change until investors finally throw in the towel on the capital gains lottery and start demanding dividends at the point of pitchforks.
- WalterBright 12y ago
  A simpler, and effective, approach is if you don't like what a CEO is doing, don't invest in the company. I recall years ago a CEO stating that he was adjusting the accounting to reflect numbers "that stock analysts were looking for." He underestimated the investors - they weren't fooled, the stock price tanked and he went out the door.
  - Osiris 12y ago
    I wouldn't consider buying a company's stock really as investing in that company, because 1) the company doesn't receive any benefit from your purchase except at IPO, and 2) your only incentive is to wait for the price to go up and sell. Larger investors that buy up significant percentages of a company may be more invested, but again their goal is just for an increase in stock price, but for the long-term stability and growth as a company. If a company is privately owned, the owners and employees have an incentive for the company to grow over the long term and focus on stability rather than quick wins and short-term financials.
    - WalterBright 12y ago
      > the company doesn't receive any benefit from your purchase except at IPO This is incorrect: 1. corporations often issue more stock and sell it in order to raise working capital 2. employee compensation often comes in the form of stock in one way or another 3. a rising stock price means a company needn't pay out dividends in order to satisfy investors 4. without a rising stock, a company will find it much, much harder to attract investors, employees, borrow money, attract customers, etc. Few want to get on board with a loser company.
  - 12y ago
apalmer 12y ago
Ehh this isnt really rocket science. If you take someone who is specifically focused on their own benefit over that of the company, and you have that person run your company... they are going to make choices that benefit them more than your company... I wouldnt say CEOs arent worth it, but the incentives are completely perverse.
- Peaker 12y ago
  This kind of reasoning after-the-fact is easy. If it was the opposite, it would also not really be rocket science: "Good CEO's have immense values for companies. So of course companies would pay a lot more for those CEOs that do a good job -- it is worth so much to the company." You can't really make useful predictions with that kind of reasoning.
- notahacker 12y ago
  The study shows how [over]compensating CEOs with stock options has a much more negative impact on their future stock price than [over]compensating them with cash. In other words, the more aligned CEOs' incentives were with the indicator of the performance of the company, the worse the company did.
abraxasz 12y ago
Ok, so I do believe that CEO's are usually overpaid with regard to their performance. That being said, I am not convinced by the methodology used in the study, specifically the period used for measuring the performance: 3 years. It sounds like a lot of time, but actually, I would expect a truly great CEO to undertake projects with a 5 years or more horizon. There's this great interview of Bezos discussing the point of focusing on quarterly results vs long term. So an alternative explanation for the findings could be: the highest paid CEOs invest in 5-10 years projects, so their results after 3 years are below average. Again, I repeat that even before reading the study, I intuitively agreed with their conclusion, but I'm not so sure about their argument to prove it
- CWuestefeld 12y ago
  Looking at the first 3 years seems almost doomed to failure. It seems to me that it's pretty likely that a new CEO is going to be taking a company in a direction at least slightly different. That means cutting out some projects may have been just about to pay off, while at the same time embarking on new ventures that won't bear fruit for some time. One might interpret these results to say, "the highest-paid CEOs are engaging in the most expensive change for their firms". It's only natural that significant change is both forgoing some income that would have been realized soon, and creating risks for what's in the short-to-medium term while they look to the horizon. This is all to be expected, and doesn't necessarily say anything about the amount of value they create in the long term.
  - Spooky23 12y ago
    Stock prices are based on the market's view of the future. You don't evaluate a CEO like a middle manager. If he cuts some critical program for strategic reasoning, the market will either punish him or reward him based on the future outlook.
    - voronoff 12y ago
      Stock markets also consider risk, so when a new CEO pushes for a new direction, that's penalized initially even if it's the correct long term approach because more is unknown.
beat 12y ago
I'm not happy that they led with Larry Ellison as an example. As a Founder-CEO, his perspective on the company is fundamentally different from the mercenary CEOs running companies they didn't found or haven't worked at for decades.
Eliezer 12y ago
I'm skeptical because it sounds like this effect should be tradeable, unless they're using some measure of shareholder returns which doesn't imply that you could short-sell high-paid-CEO equities and buy median-paid-CEO equities and get an excess return. In other words, it sounds like this study is postulating an exploitably inefficient market, unless this kind of data only recently became available. http://lesswrong.com/lw/yv/markets_are_antiinductive/ http://lesswrong.com/lw/yv/markets_are_antiinductive/ To be clear, I'm very willing to believe that the companies with the highest-paid CEOs have generally poor governance and will antiperform on some appropriate metric, like price-to-book. But that metric shouldn't be equity price changes because CEO pay is public info, people are already speculating about it as a negative sign, and the market should already be taking that into account and pricing such shares lower (meaning that the returns cost less, hence such stocks should return the market rate, albeit perhaps with greater volatility).
- dnautics 12y ago
  The treasurer of my nonprofit who worked the short book at a hedge fund for a bit, commented on using this effect in his analyses, although usually for him it was lavish compensation packages that don't count stock-based compensation. I'd worry that the inclusion of stock-based compensation introduces a different sort of artefact (a time-bias). By the nature of our bubblicious economy, CEOs in general are going to enjoy abnormally high stock-based returns in the 3-year run up to a stock market crash.
- mtdewcmu 12y ago
  I pretty much guarantee that if you ran the numbers with intent to profit off this phenomenon, you'd find that its predictive value is null. A commenter down below speculated that it sounds a lot like simple regression to the mean.
- ucha 12y ago
  It doesn't matter that the effect is tradable. What matters is that there is no possible arbitrage i.e. a way to make money with a 100% probability. For example, would you enter a bet in which you have a 50% chance of loosing $1000 and a 50% chance of making $1001 if you can enter it only once a year? There are many many observable patterns that contradict the efficient market hypothesis amongst which: - historical option volatility is lower than implied vol - you can make money by writing options. - sell in may and go away strategy - you can make money (and beat the index) by being long the SP500 only between october-may - strong contango in the VIX futures market - you can make money by shorting a volatility ETN like VXX that rolls near-maturation future contracts. - mean-reversion on the second day after an earnings release - you can make money by going short if the stock price rises after the earnings call or vice-versa In the end, what matters is how much risk (volatility, max drawdown...) you're willing to take for superior returns. That is often summarized by the information ratio of your strategy which is equal to (return of your strat - return of the bechmark)/vol(difference in returns).
nostrademons 12y ago
This may be a correlation-vs-causation effect. It's possible that companies that are in poor markets and likely to do poorly in the next few years have to pay more to attract qualified CEO candidates, because good executives realize the shit the company is in and don't want to take the risk of a failure on their resume without being compensated significantly for it. This would also explain why the negative correlation is strongest at the extreme high ends of the pay scale - these are the companies that are in the worst shape - and why these CEOs relied heavily on acquisitions, because they had no talent or useful products in the organization itself. It also fits with Warren Buffett's observation that "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact." One way to confirm or deny this hypothesis would be to look at companies that previously were high-performing, and then see what the correlation between CEO pay and the change in market performance is within that group.
- scott_s 12y ago
  I thought of this as well, and I was bothered that the authors did not. (At least the author of the Forbes piece - I could not access the research paper.) The author of the Forbes piece immediately jumped into explaining the effect assuming causation, which I was not convinced has been established. To be clear, I find it reasonable that there could be causation. But we still need evidence to support that conclusion.
  - notahacker 12y ago
    The paper itself covered a lot of ground (including "firm size and prior stock performance, especially over the past three years, are significant predictors of both excess cash and incentive compensation"; the results confirm than recent stock performance is positively correlated with CEO pay). It didn't however give any detailed consideration to the obvious other hypotheses: (i) Far from being overconfident about their decisions, top paid CEOs (and the boards that negotiate their pay packet) are actually more conservative than the market about the future prospects for the stock, so are willing to agree bigger stock-based incentive packages as a result. CEOs generally should have more insight into the workings of their firms than Wall Street analysts, of course... (ii) If a CEO's pay packet at time t predicts good stock performance since t-3 and bad stock performance up to t+3 might it be that their ability to prevent the firm's stock price reverting to the mean is limited (even if they're actually still doing a good job... and receiving acknowledgement in the form of pay packets more focused on that difficulty) There's also [iii] The decisions the CEO makes is not even slightly affected by their pay structure but high CEO compensation packages is a good proxy for lack of board oversight but that's a lot closer (and to a large extent compatible with) the authors' hypothesis about overconfidence
lnanek2 12y ago
I realize it is popular to hate CEOs nowadays, but the article sure seems to be stretching with its conclusions. It seems much simpler and more likely to simply conclude that companies pay CEOs more than usual and give them large non-cash incentives when the company is doing badly and they are trying to buy their way out of a problem. That explains the increased mergers as well.
aetherson 12y ago
I don't see how it can simultaneously be the case that: Though Cooper concedes that there could be exceptions at specific companies (the study didn’t measure individual firms) and How could this be? In a word, overconfidence. CEOs who get paid huge amounts tend to think less critically about their decisions. “They ignore dis-confirming information and just think that they’re right,” says Cooper. If he didn't look at individual people, how can he speak to the psychology of the effect? Are we suggesting that overconfidence shows up statistically as differentiated from other poor performance? What is the statistical proxy being used here?
moron4hire 12y ago
How does one go about becoming a CEO? What sort of career progression does it take?
- FLUX-YOU 12y ago
  Look up CEOs on Linkedin, look at their history. Maybe shoot them some messages. Networking is necessary anyway. My uncle, who runs a resort as CEO, started as a bellhop with no college and just climbed in rank (I'm glossing over because I don't know the entire story). I'm pessimistic and feel like that progression is very, very rare today in larger companies with everyone trying to hold on to middle-class positions as they dry up (so says the news). Hard to advance when there's no room. You'd also likely hit a ceiling today without a degree instead of in the past. At the same time, I make a grand $15/hr, so I can only glimpse what I've heard from him. Definitely dig and try to reach out.
- sosuke 12y ago
  If you figure it out let me know, because I'm much more interested in making that much money instead of keeping others from making that much money.
digz 12y ago
I haven't read the paper, just the article. It's possible some of these are directly addressed, but I would want to know more before any credibility is given to the conclusions. Some alternative explanations: - The 'lowest paid CEOs', per their definition, are typically the ones who have the most skin in the game. When you have many CEOs out there with only $1 compensation, and just stock (and not stock grants as the author mention), they will inevitably be on the bottom. Think Zuckerberg, Google, Apple w/ Jobs, etc. One would expect this highly underpaid group to outperform. - The highest paid CEOs are often times the ones dealing with the most troubled companies. If you were a shareholder of Kodak in 2000 and saw that digital cameras were coming, would you want to pay for the best CEO possible to ensure you could harvest the most out of the company? Kodak would still underperform the market, but maybe they would have underperformed the market more with inferior management. - This is a little technical, but with an experienced manager pulling in big dollars, it's more likely that this is a well established company and manager that are well understood by the market. This means that the risk premium demanded by investors would be smaller resulting in a higher stock price. This means that the stock has less to move. And on the other hand, more unproven companies with cheaper managers will have higher risk premia demanded by investors, resulting in lower stock price and therefore have more room to go up over time as some of the unknowns are answered. Ideally we'd need include other variables such as market size and expected growth (P/E Ratio), CEO share ownership, ex-ante company distress, etc. into the analysis. Based on the described methodology, it doesn't sound like that was done.. but again, didn't read the paper itself.
stretchwithme 12y ago
One thing that could improve performance: only let CEOs sell their stock gradually over a 5 year period after the exercise their options. Too much risk for the CEO? He's the one with the most influence over future performance. If he's putting the company on a good long term footing and chooses a good successor, he'll do fine. If we incent CEOs to think long term, its more likely they will. CEOs that are founders or that have huge investments in their company's stock already tend to think long term.
QuantumChaos 12y ago
People need to take the efficient market hypothesis seriously when using stock prices for things like this. The announcement of a new CEO (or more realistically, the rumors preceding the announcement) already given the market a chance to adjust based on their expectations of the CEO. So what the study really shows is that highly paid CEOs tend to perform less well than the market would expect. This might be because they perform worse. It might also be because they perform better, but not by as large a margin as the market expected.
sambeau 12y ago
My take from this: it highlights the worst performing boards – i.e. those that compensate highly despite poor performance.
njx 12y ago
Check out CEO compensation for Fortune 500 https://my.infocaptor.com/dash/mt.php?pa=ceo_compensation_2012_5159dc6ecb22b https://my.infocaptor.com/dash/mt.php?pa=ceo_compensation_20...
pistle 12y ago
Poor performing companies make bad decisions. One of those decisions may be how much to pay a CEO. The causation arrow may be going the wrong direction.
quadrangle 12y ago
The biggest problem is shown by the article saying that the results are "counter-intuitive". That certainly isn't my experience.

260 points by dbingham 12y ago

> "The more CEOs are paid, the worse the firm does over the next three years, as far as stock performance and even accounting performance" Yeah well this entire study is invalidated by using stock performance as the lazy way to measure CEO performance. Expensive CEOs are typically expensive, because they're hired to fix a company that everyone knows is going down. The riskier the company, the more the stock is expected to go worthless, the more you get paid in cash for taking on the job. So it's expected that if you look for expensive CEOs you'll be seeing stock/accounting performance going down in short to mid term, because recoveries, whether successful or not, take time. They take years. Also are you honestly counting CEOs who get millions in stock and $1 pay as... just getting $1 in pay? How stupid are you.

JacobJans 12y ago
> Also are you honestly counting CEOs who get millions in stock and $1 pay as... just getting $1 in pay? How stupid are you. That's not what's implied by the article: "big chunks of the compensation packages for the highest-paid CEOs come in the form of stock and stock options." Edit: From the paper.... "To better understand the drivers of the pay effect, we decompose pay into its major components. We find that most pay components are negatively related to future abnormal returns earned by these firms, with the strongest components being the value of options granted and long-term incentive payouts. However when we add other control variables that have been shown to explain the cross-section of returns, the components largely lose their significance, with the exception of the value of options granted, which emerges as the main driver of the pay effect."
Permit 12y ago
>Also are you honestly counting CEOs who get millions in stock and $1 pay as... just getting $1 in pay? How stupid are you. No. And neither did the study.[1] >We use three measures of compensation: (i) total compensation (TDC1) which includes salary, bonus, total value of restricted stock granted, total value of stock options granted (using Black Scholes), and long term incentive payouts, (ii) total cash compensation (TCC) which includes salary and bonus, and (iii) the difference between total compensation and total cash compensation (TDC1-TCC) which is meant to capture the options and incentive components of total compensation. This difference, which we call incentive compensation, is our primary variable of interest, including restricted stock grants, option grants, long term incentive payouts, and other annual noncash compensation. [1] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1572085 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1572085
mikeryan 12y ago
The study was explicitly looking for a correlation between stock performance and CEO compensation, the compensation included bonuses and stock/options. I'm not sure stock performance is necessarily a lazy indicator. Considering that Company Board's hire CEO's pretty much entirely on how well they can move this needle.
michaelkeenan 12y ago
Future expectations about stocks affect their price today. If a company is known to be in trouble, its shares will already be cheap. (A few people, most notably Warren Buffett, can reasonably disagree with this, because they're already very rich from beating the market. Everyone else should just assume that Warren Buffett has already traded the share down to its appropriate price.) I suspect that the overconfidence explanation given in the article is closer to the right explanation. I was suspicious at first, but then the article gave figures about mergers. It's widely known that mergers usually don't meet expectations, so maybe overconfidence would lead a CEO to think they could escape this statistical fate.
josu 12y ago
I can't agree with you more. This would have been a nice study if it didn't reach any conclusions; just laid the data, pointed out all the possible reasons why their analysis could be wrong and paved the way for a better study. One example, their data only covers from 1994 to 2011. PS: Direct link to the study http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1572085 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1572085
- ceejayoz 12y ago
  The standard format for a scientific paper includes a discussion section, where you're supposed to draw such conclusions and interpret the results and their significance.
  - josu 12y ago
    Then this document should not be called a "scientific paper" or/and should never be published.
    - ceejayoz 12y ago
      Sorry, what? It shouldn't be called a scientific paper because it follows the standard format for one?
- CatMtKing 12y ago
  Then it wouldn't be a study; it would be data collection.
  - josu 12y ago
    I'm ok with that. But I guess that "data collection" documents don't count towards academia points.
    - CatMtKing 12y ago
      Sort of like: Here's the data. Analysis is an exercise left to the reader? I guess what I'm trying to point out here is that while collecting data does take up most of the bulk of the work, data is meaningless without analysis and direction to inform further gathering. That's why the field of study called statistics exists. It's not just about academia points. On the same vein, the reader should be critical of the analysis; it should not be taken as accepted truth. And the writer should try to predict and address criticisms.

balls187 12y ago

Interestingly, Peter Thiel wrote that Startup success is correlated with CEO pay (or the lack there-of) http://techcrunch.com/2008/09/08/peter-thiel-best-predictor-of-startup-success-is-low-ceo-pay/ http://techcrunch.com/2008/09/08/peter-thiel-best-predictor-...

sparkzilla 12y ago
Thiel's idea is fine if you're a kid eating ramen and living with your parents, but it is completely wrong for people who already have experience, and/or have families to support. I actually lost an investment because the investor thought I should not pay myself at all while trying to build the business.
- 31reasons 12y ago
  >>I actually lost an investment because the investor thought I should not pay myself at all while trying to build the business. That is absurd, they don't deserve to be investors. You receive money in exchange for equity. The money is used to run the company and build value for the investors. Providing salary to everyone who is engaged in building value must be part of the equation. Otherwise if you think about it, in extreme case you will give away your entire company to build value for investors and you will get nothing in the end.
  - sparkzilla 12y ago
    Tell me about it. He actually said to me that instead of making an investment, he should own the company and would just pay me a salary to build the business. I respectfully declined.
- balls187 12y ago
  You're a founder, so none of this should be shocking, early stage startups are cash strapped, and cash-in-the-bank is the 2nd most valuable commodity a company has, after it's people. In fact, the #1 reasons startup's will fail, will because they run out of money. Thus, a CEO who doesn't treat their cash as the valuable resource it is, is just putting an unnecessary burden on their company. Peter Thiel isn't advocating paying yourself nothing. His point (and data[1] backs this up), that CEO's making a high salary is a pretty good indicator of Startup that will fail. If you need a high salary, then being a Founder/CEO probably isn't the right move. You're putting a burden on the company because of your life style choices. Conversely, if you don't pay yourself anything, you're going to spend too much time dealing with the pain of not making ends meet, instead spending your energy growing your company. [1] http://blog.startupcompass.co/73-percent-of-startup-founders-make-50-dollars-000-per-year-or-less http://blog.startupcompass.co/73-percent-of-startup-founders...

malandrew 12y ago

I'm really curious about the relationship of CEO compensation and employee satisfaction/morale in companies. I have lost count of the number of times I've heard about a CEO, COO or CFO getting 8 figure salaries while the rank and file employees had to forego their bonuses in a touch year. I cannot begin to imagine how devastating that knowledge is to employee morale.

nyrina 12y ago
The best I remember is that a Danish bank (I think it was "Nordea" or "Danske Bank", but I'm not sure and my search-karma seems to have gone for the day) had a CEO who got a huge bonus for meeting his goals in making a profit back in 2009 or 2010. The way he did that, though, was to fire 30% of the staff (and branches) and living off the profit from the hard work those 30% did the previous years - the next years they had bigger and bigger deficits, because they couldn't keep living off previous years loans.
sirkneeland 12y ago
I went through it last year. Our company didn't make money so no bonuses for us while the CEO got a handsome package of some $25 million. It's pretty terrible to go through. Even if you didn't think the CEO has done a terrible job (I officially have no comment on the matter), it was still terrible.

endlessvoid94 12y ago

It's naive to not pay yourself a reasonable salary once you can afford to. One of the biggest regrets of failed first-time CEOs is that they didn't pay themselves enough.

_delirium 12y ago
This is studying CEOs of large companies, not startup founders who hire themselves as CEOs and set their own salary.
dubcanada 12y ago
A reasonable salary is not $28 million a year.
- marknutter 12y ago
  It is if you're in high demand. LeBron James, for instance, earns $19MM per year and generates far more than that in revenues for the Miami Heat and NBA.
  - smacktoward 12y ago
    The NBA also has a salary cap for players: http://en.wikipedia.org/wiki/NBA_salary_cap http://en.wikipedia.org/wiki/NBA_salary_cap A salary cap for CEOs would be an interesting experiment.
    - fallse7en 12y ago
      But whereas the NBA can enforce a salary cap for its players, who would enforce the salary cap for CEOs?
      - Crito 12y ago
        Shareholders presumably, if they cared to.
      - venomsnake 12y ago

JacobJans 12y ago

I think this is the most interesting excerpt from the study: "The level of incentive compensation is significantly negatively related to the forward ROA, while the level of cash compensation is positively related to the level of ROA. Overall, we conclude that our results seem most consistent with the hypothesis that overconfident CEOs accept large amounts of incentive pay and consequently engage in value destroying activities that translate into future reductions in returns and firm performance. "

tjradcliffe 12y ago
I wonder about that "overconfident" label, and it might be possible to tease various effects out of the data. Consider two possibilities: 1) CEOs with large incentive pay are irrationally confident in the success of risky policies 2) CEOs with large incentive pay are behaving like economically rational agents... betting someone else's money. That is, incentive pay is more like a free pass to a casino where your losses are made good but you keep some fraction of your winnings. Under those circumstances taking large risks may be the most rational thing to do, IF the cash component of the CEO's compensation is sufficient to keep them in caviar and summer homes while they gamble the firm's money away.
- camelite 12y ago
  Your second possibility covers not only executives who partake in high-risk gambles but also executives who deliberately bankrupt their company for personal profit. A canny executive doesn't rob the firm by dipping his fingers in the till but by, for instance, loading the firm with gold-plated rubbish and extracting a personal profit in the form of compensation, stock-options etc, before the sheen wears off.
cbsmith 12y ago
Small problem: the incentive compensation is mostly options, and the way that package is measured is based on the value of the options at that moment in time. Options with high valuations are effectively pay for past performance that is consequently now worth something.

highace 12y ago

...but the best negotiators, evidently.

squozzer 12y ago

The article merely scratches the surface. We can probably agree that corporations have certain structural flaws, but I doubt making a CEOs life more burdensome - who would take the job under a claw-back regime without some kind of financial protection? - will improve the picture. One line of inspiration come from government - maybe a bicameral board - one for managing quarterlies, the other for longer horizons - might fix some issues. Another might be to limit cronyism - boards seats given to CEO appointees, or limiting the number of board seats a person can hold.

marknutter 12y ago

"The Highest-Paid CEOs Are The Worst Performers, New Study <Which Is in Line with People's Assumptions> Says"

skndr 12y ago
This is a Common Sense Fallacy[0]. Playing devil's advocate, the result could have been that CEO pay was very well correlated with performance. The company doing well can justify a higher compensation. Of course, this is probably the argument that gets used. [0] http://corkskeptics.org/2011/05/03/the-common-sense-fallacy/ http://corkskeptics.org/2011/05/03/the-common-sense-fallacy/

reversiontomean 12y ago

Is it possible that what we're seeing here is a reversion to the mean[1] - CEOs who do particularly well some years get large pay packages, and then when their performance reverts to the mean in subsequent years they end up overpaid relative to performance? [1] Thinking, Fast and Slow by Daniel Kahneman

gojomo 12y ago
Probably! Also perhaps, Winner's Curse: those who've paid the most in a competitive process are most often those who overestimated the value received. http://en.wikipedia.org/wiki/Winner%27s_curse http://en.wikipedia.org/wiki/Winner%27s_curse And Tournament Theory: compensation is often based not on proportionate productivity, but rank order, which may be easier to measure, and serves as probabilistic-motivation for other workers competing for the top spot. http://en.wikipedia.org/wiki/Tournament_theory http://en.wikipedia.org/wiki/Tournament_theory
mtdewcmu 12y ago
You beat me to it. Another way to state it would be that having a richly-paid CEO is a lagging indicator; or the companies with the resources to have a trophy CEO are likely already topped out and running up against the law of large numbers. Imagine being Tim Cook, CEO of Apple: he ought to expect high pay for such a prestigious job (I haven't looked it up), but continuing to grow the stock price at past rates would be next to impossible.
- jsw97 12y ago
  Yes, but they are not comparing future performance to past performance, but rather to that of similar firms.
  - mtdewcmu 12y ago
    I'm sure they ruled out the more obvious confounding variables. All else being equal, you would expect a result like they got, based on the null hypothesis that expensive CEOs are at least average among CEOs, combined with the suspicion that their hiring is not a random event. Factor in that the researchers were undoubtedly biased in favor of the outcome they found, and a lot of skepticism is justified in making sense of this.

bunderbunder 12y ago

There's an interesting psychological phenomenon I've read about where if you offer someone a material reward in return for doing a job, it tends to make them enjoy the job less. In extreme cases, you can take something that a person really loves to do and make it feel like a burdensome chore for them, simply by saying, "I'll give you $X to do Y". I wonder if this story could have something to do with that.

GregBuchholz 12y ago
You might enjoy "Drive: The Surprising Truth About What Motivates Us", which explores the research on that topic. http://www.danpink.com/books/drive http://www.danpink.com/books/drive
epaladin 12y ago
I think it has to do with intrinsic vs extrinsic motivation[1]. I'd be a lot happier if I didn't need to get paid for work- as soon as money is involved, my intrinsic drive/interest tends to evaporate and gets replaced with anxiety. I'm definitely a fan of basic income for that reason- the ability to create things\help people without having to be concerned about income so much. If additional income results from that, great! If not, oh well, there were likely still other benefits garnered from the experience. [1]Self-Determination Theory: http://en.wikipedia.org/wiki/Self-determination_theory http://en.wikipedia.org/wiki/Self-determination_theory
njharman 12y ago
I've seen this firsthand with artists and commissions.

carsongross 12y ago

The conflict-of-interest and self-dealing problems at the c-suite and board level are absolutely pervasive at this point. I don't think much will change until investors finally throw in the towel on the capital gains lottery and start demanding dividends at the point of pitchforks.

WalterBright 12y ago
A simpler, and effective, approach is if you don't like what a CEO is doing, don't invest in the company. I recall years ago a CEO stating that he was adjusting the accounting to reflect numbers "that stock analysts were looking for." He underestimated the investors - they weren't fooled, the stock price tanked and he went out the door.
- Osiris 12y ago
  I wouldn't consider buying a company's stock really as investing in that company, because 1) the company doesn't receive any benefit from your purchase except at IPO, and 2) your only incentive is to wait for the price to go up and sell. Larger investors that buy up significant percentages of a company may be more invested, but again their goal is just for an increase in stock price, but for the long-term stability and growth as a company. If a company is privately owned, the owners and employees have an incentive for the company to grow over the long term and focus on stability rather than quick wins and short-term financials.
  - WalterBright 12y ago
    > the company doesn't receive any benefit from your purchase except at IPO This is incorrect: 1. corporations often issue more stock and sell it in order to raise working capital 2. employee compensation often comes in the form of stock in one way or another 3. a rising stock price means a company needn't pay out dividends in order to satisfy investors 4. without a rising stock, a company will find it much, much harder to attract investors, employees, borrow money, attract customers, etc. Few want to get on board with a loser company.
- 12y ago

apalmer 12y ago

Ehh this isnt really rocket science. If you take someone who is specifically focused on their own benefit over that of the company, and you have that person run your company... they are going to make choices that benefit them more than your company... I wouldnt say CEOs arent worth it, but the incentives are completely perverse.

Peaker 12y ago
This kind of reasoning after-the-fact is easy. If it was the opposite, it would also not really be rocket science: "Good CEO's have immense values for companies. So of course companies would pay a lot more for those CEOs that do a good job -- it is worth so much to the company." You can't really make useful predictions with that kind of reasoning.
notahacker 12y ago
The study shows how [over]compensating CEOs with stock options has a much more negative impact on their future stock price than [over]compensating them with cash. In other words, the more aligned CEOs' incentives were with the indicator of the performance of the company, the worse the company did.

abraxasz 12y ago

Ok, so I do believe that CEO's are usually overpaid with regard to their performance. That being said, I am not convinced by the methodology used in the study, specifically the period used for measuring the performance: 3 years. It sounds like a lot of time, but actually, I would expect a truly great CEO to undertake projects with a 5 years or more horizon. There's this great interview of Bezos discussing the point of focusing on quarterly results vs long term. So an alternative explanation for the findings could be: the highest paid CEOs invest in 5-10 years projects, so their results after 3 years are below average. Again, I repeat that even before reading the study, I intuitively agreed with their conclusion, but I'm not so sure about their argument to prove it

CWuestefeld 12y ago
Looking at the first 3 years seems almost doomed to failure. It seems to me that it's pretty likely that a new CEO is going to be taking a company in a direction at least slightly different. That means cutting out some projects may have been just about to pay off, while at the same time embarking on new ventures that won't bear fruit for some time. One might interpret these results to say, "the highest-paid CEOs are engaging in the most expensive change for their firms". It's only natural that significant change is both forgoing some income that would have been realized soon, and creating risks for what's in the short-to-medium term while they look to the horizon. This is all to be expected, and doesn't necessarily say anything about the amount of value they create in the long term.
- Spooky23 12y ago
  Stock prices are based on the market's view of the future. You don't evaluate a CEO like a middle manager. If he cuts some critical program for strategic reasoning, the market will either punish him or reward him based on the future outlook.
  - voronoff 12y ago
    Stock markets also consider risk, so when a new CEO pushes for a new direction, that's penalized initially even if it's the correct long term approach because more is unknown.

beat 12y ago

I'm not happy that they led with Larry Ellison as an example. As a Founder-CEO, his perspective on the company is fundamentally different from the mercenary CEOs running companies they didn't found or haven't worked at for decades.

Eliezer 12y ago

I'm skeptical because it sounds like this effect should be tradeable, unless they're using some measure of shareholder returns which doesn't imply that you could short-sell high-paid-CEO equities and buy median-paid-CEO equities and get an excess return. In other words, it sounds like this study is postulating an exploitably inefficient market, unless this kind of data only recently became available. http://lesswrong.com/lw/yv/markets_are_antiinductive/ http://lesswrong.com/lw/yv/markets_are_antiinductive/ To be clear, I'm very willing to believe that the companies with the highest-paid CEOs have generally poor governance and will antiperform on some appropriate metric, like price-to-book. But that metric shouldn't be equity price changes because CEO pay is public info, people are already speculating about it as a negative sign, and the market should already be taking that into account and pricing such shares lower (meaning that the returns cost less, hence such stocks should return the market rate, albeit perhaps with greater volatility).

dnautics 12y ago
The treasurer of my nonprofit who worked the short book at a hedge fund for a bit, commented on using this effect in his analyses, although usually for him it was lavish compensation packages that don't count stock-based compensation. I'd worry that the inclusion of stock-based compensation introduces a different sort of artefact (a time-bias). By the nature of our bubblicious economy, CEOs in general are going to enjoy abnormally high stock-based returns in the 3-year run up to a stock market crash.
mtdewcmu 12y ago
I pretty much guarantee that if you ran the numbers with intent to profit off this phenomenon, you'd find that its predictive value is null. A commenter down below speculated that it sounds a lot like simple regression to the mean.
ucha 12y ago
It doesn't matter that the effect is tradable. What matters is that there is no possible arbitrage i.e. a way to make money with a 100% probability. For example, would you enter a bet in which you have a 50% chance of loosing $1000 and a 50% chance of making $1001 if you can enter it only once a year? There are many many observable patterns that contradict the efficient market hypothesis amongst which: - historical option volatility is lower than implied vol - you can make money by writing options. - sell in may and go away strategy - you can make money (and beat the index) by being long the SP500 only between october-may - strong contango in the VIX futures market - you can make money by shorting a volatility ETN like VXX that rolls near-maturation future contracts. - mean-reversion on the second day after an earnings release - you can make money by going short if the stock price rises after the earnings call or vice-versa In the end, what matters is how much risk (volatility, max drawdown...) you're willing to take for superior returns. That is often summarized by the information ratio of your strategy which is equal to (return of your strat - return of the bechmark)/vol(difference in returns).

nostrademons 12y ago

This may be a correlation-vs-causation effect. It's possible that companies that are in poor markets and likely to do poorly in the next few years have to pay more to attract qualified CEO candidates, because good executives realize the shit the company is in and don't want to take the risk of a failure on their resume without being compensated significantly for it. This would also explain why the negative correlation is strongest at the extreme high ends of the pay scale - these are the companies that are in the worst shape - and why these CEOs relied heavily on acquisitions, because they had no talent or useful products in the organization itself. It also fits with Warren Buffett's observation that "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact." One way to confirm or deny this hypothesis would be to look at companies that previously were high-performing, and then see what the correlation between CEO pay and the change in market performance is within that group.

scott_s 12y ago
I thought of this as well, and I was bothered that the authors did not. (At least the author of the Forbes piece - I could not access the research paper.) The author of the Forbes piece immediately jumped into explaining the effect assuming causation, which I was not convinced has been established. To be clear, I find it reasonable that there could be causation. But we still need evidence to support that conclusion.
- notahacker 12y ago
  The paper itself covered a lot of ground (including "firm size and prior stock performance, especially over the past three years, are significant predictors of both excess cash and incentive compensation"; the results confirm than recent stock performance is positively correlated with CEO pay). It didn't however give any detailed consideration to the obvious other hypotheses: (i) Far from being overconfident about their decisions, top paid CEOs (and the boards that negotiate their pay packet) are actually more conservative than the market about the future prospects for the stock, so are willing to agree bigger stock-based incentive packages as a result. CEOs generally should have more insight into the workings of their firms than Wall Street analysts, of course... (ii) If a CEO's pay packet at time t predicts good stock performance since t-3 and bad stock performance up to t+3 might it be that their ability to prevent the firm's stock price reverting to the mean is limited (even if they're actually still doing a good job... and receiving acknowledgement in the form of pay packets more focused on that difficulty) There's also [iii] The decisions the CEO makes is not even slightly affected by their pay structure but high CEO compensation packages is a good proxy for lack of board oversight but that's a lot closer (and to a large extent compatible with) the authors' hypothesis about overconfidence

lnanek2 12y ago

I realize it is popular to hate CEOs nowadays, but the article sure seems to be stretching with its conclusions. It seems much simpler and more likely to simply conclude that companies pay CEOs more than usual and give them large non-cash incentives when the company is doing badly and they are trying to buy their way out of a problem. That explains the increased mergers as well.

aetherson 12y ago

I don't see how it can simultaneously be the case that: Though Cooper concedes that there could be exceptions at specific companies (the study didn’t measure individual firms) and How could this be? In a word, overconfidence. CEOs who get paid huge amounts tend to think less critically about their decisions. “They ignore dis-confirming information and just think that they’re right,” says Cooper. If he didn't look at individual people, how can he speak to the psychology of the effect? Are we suggesting that overconfidence shows up statistically as differentiated from other poor performance? What is the statistical proxy being used here?

moron4hire 12y ago

How does one go about becoming a CEO? What sort of career progression does it take?

FLUX-YOU 12y ago
Look up CEOs on Linkedin, look at their history. Maybe shoot them some messages. Networking is necessary anyway. My uncle, who runs a resort as CEO, started as a bellhop with no college and just climbed in rank (I'm glossing over because I don't know the entire story). I'm pessimistic and feel like that progression is very, very rare today in larger companies with everyone trying to hold on to middle-class positions as they dry up (so says the news). Hard to advance when there's no room. You'd also likely hit a ceiling today without a degree instead of in the past. At the same time, I make a grand $15/hr, so I can only glimpse what I've heard from him. Definitely dig and try to reach out.
sosuke 12y ago
If you figure it out let me know, because I'm much more interested in making that much money instead of keeping others from making that much money.

digz 12y ago

I haven't read the paper, just the article. It's possible some of these are directly addressed, but I would want to know more before any credibility is given to the conclusions. Some alternative explanations: - The 'lowest paid CEOs', per their definition, are typically the ones who have the most skin in the game. When you have many CEOs out there with only $1 compensation, and just stock (and not stock grants as the author mention), they will inevitably be on the bottom. Think Zuckerberg, Google, Apple w/ Jobs, etc. One would expect this highly underpaid group to outperform. - The highest paid CEOs are often times the ones dealing with the most troubled companies. If you were a shareholder of Kodak in 2000 and saw that digital cameras were coming, would you want to pay for the best CEO possible to ensure you could harvest the most out of the company? Kodak would still underperform the market, but maybe they would have underperformed the market more with inferior management. - This is a little technical, but with an experienced manager pulling in big dollars, it's more likely that this is a well established company and manager that are well understood by the market. This means that the risk premium demanded by investors would be smaller resulting in a higher stock price. This means that the stock has less to move. And on the other hand, more unproven companies with cheaper managers will have higher risk premia demanded by investors, resulting in lower stock price and therefore have more room to go up over time as some of the unknowns are answered. Ideally we'd need include other variables such as market size and expected growth (P/E Ratio), CEO share ownership, ex-ante company distress, etc. into the analysis. Based on the described methodology, it doesn't sound like that was done.. but again, didn't read the paper itself.

stretchwithme 12y ago

One thing that could improve performance: only let CEOs sell their stock gradually over a 5 year period after the exercise their options. Too much risk for the CEO? He's the one with the most influence over future performance. If he's putting the company on a good long term footing and chooses a good successor, he'll do fine. If we incent CEOs to think long term, its more likely they will. CEOs that are founders or that have huge investments in their company's stock already tend to think long term.

QuantumChaos 12y ago

People need to take the efficient market hypothesis seriously when using stock prices for things like this. The announcement of a new CEO (or more realistically, the rumors preceding the announcement) already given the market a chance to adjust based on their expectations of the CEO. So what the study really shows is that highly paid CEOs tend to perform less well than the market would expect. This might be because they perform worse. It might also be because they perform better, but not by as large a margin as the market expected.

sambeau 12y ago

My take from this: it highlights the worst performing boards – i.e. those that compensate highly despite poor performance.

njx 12y ago

Check out CEO compensation for Fortune 500 https://my.infocaptor.com/dash/mt.php?pa=ceo_compensation_2012_5159dc6ecb22b https://my.infocaptor.com/dash/mt.php?pa=ceo_compensation_20...

pistle 12y ago

Poor performing companies make bad decisions. One of those decisions may be how much to pay a CEO. The causation arrow may be going the wrong direction.

quadrangle 12y ago

The biggest problem is shown by the article saying that the results are "counter-intuitive". That certainly isn't my experience.