Higher pay for underperformance


It would seem obvious that companies that do well—enjoy better profits and deliver higher returns to their shareholders—would pay their CEOs more, while companies that didn’t fare as well would pay less.

It would also be wrong.

A study by MSCI’s corporate governance research group has found that companies that paid their CEOs above the median for all comparable CEOs performed less well than those who compensated their CEOs at or below the median.  Looking at 10 years of data for more than 800 CEOs at 429 large public companies, the group found that $100 invested in the 20% of companies that paid their CEOs the most yielded a total dollar value of $264.76 between 2006 and 2015.  If you put the same $100 in the 20% of companies that paid their CEOs the least, you would have ended up with $367.17.  These results include both capital gains (movements in the share price) and dividends.

The researchers concluded that the higher-compensated executives might be focusing more of their attention on short-term rather than long-term results.  They argue that it’s time to rethink and restructure CEO compensation—and perhaps recognize that the people at the top are not quite as important as they (and their hand-picked compensation committee) think they are.

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 




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