I’m gonna keep harping on this issue until Say On Pay gets done for shareholders and apparently, so will Jason Zweig.
If you’re not familiar with Zweig, he’s the Wall Street Journal‘s Intelligent Investor columnist and he’s doing phenomenal work in exposing the failure of corporate boards, directors and executives and said failure’s effects on the investor class and our economy.
In his latest piece, he’s got the results of a pair of studies on what high CEO compensation actually means to shareholder returns and company profitability…
From the WSJ:
The first study (Harvard Law School) looked at more than 2,000 companies to see what share of the total compensation earned by the top five executives went to the CEO. The researchers call this number—which averages about 35%—the “CEO pay slice.”
It turns out that the bigger the CEO’s slice of the pie, the lower the company’s future profitability and market valuation.
Of course. This is because these are probably organizations where a megalomaniacal CEO is ruling with an iron fist – even lording over his own CFO, CIO, COO etc.
And the second study?
…looked at CEO pay and stock returns for roughly 1,500 companies per year from 1994 through 2006. They found that the 10% of firms with the highest-paid CEOs produce stock returns that lag their industry peers by more than 12 percentage points, cumulatively, over the next five years.
Companies at the top of the pay pile…award their CEOs an annual average of $23 million—but leave their shareholders poorer (relative to other companies in the same industry) by an average of $2.4 billion per year. Each dollar that goes into the CEO’s pocket takes $100 out of shareholders’ pockets.
All of this gets back to governance and the news ain’t good. Shares and salaries are being handed out for just showing up, directors are boys with the execs and in many cases handpicked – so they certainly ain’t rockin’ the boat either.
Until shareholders are given the right to pay fair market rates for talent BASED ON THE PERFORMANCE OF A COMPANY AND ITS STOCK this will not change. Icahn knows it, Ben Graham knew it, and the more exposure studies like these get, the sooner the gloves will come off and capitalism will win out.