Performance for Pay? The Relation Between CEO Incentive Compensation and Future Stock Price Performance
, a paper from U of Utah business-school professors, the
relationship between executive performance and executive pay is
intensively investigated. The authors carefully document that the
highest-paid executives in the 1,500 companies with the biggest market
cops from 1994-2013 perform the worst, and that the higher a CEO’s pay,
the more likely it is that he’ll perform worse than his low-paid
colleagues. The effect was most pronounced in the 150 highest-paid CEOs.
The authors propose that sky-high pay leads CEOs to be overconfident –
after all, if they’re getting $37M for a year’s work, they must be
pretty damned smart, so anyone who disagrees with them is clearly an
idiot, after all, look at how little that critic is paid! The longer a
CEO is in office, the worse his performance becomes, because he is able
to pack the board with friendly cronies who keep hiking his pay and
overlooking his underperformance. And CEOs suck at figuring out when to
exercise their stock options, generally getting less money than they
would by following conventional financial advice.
And now the big question: will board of directors and hiring committees learn from this?
Ha ha ha, just kidding. Of course not.