The companies that pay their chief executives the most see the worst results for shareholders, according to a new study, with an average annual shareholder loss of $1.4 billion at the companies with the highest CEO pay.
Exorbitant CEO compensation packages breed overconfidence, study authors Michael Cooper, Huseyin Gulen, and Raghavendra Rau write, and overconfidence leads to bad decisions about weakened business performance. Contrary to the common claim that paying executives in stock will improve their management of a firm, the study finds that CEOs who are given non-cash incentive compensation actually perform worse. The negative effects of excess executive pay linger for three years and drag shareholder returns down by between 8 and 11 percent for companies with the most lavish CEO pay packages.
The study by economists at the University of Utah’s David Eccles School of Business examined 17 years of executive compensation and corporate performance data, which is a longer time frame than any previous research on the topic has analyzed. The authors note that their findings about the inverse relationship between CEO compensation and company performance hold up even after controlling for a variety of factors that have been found to influence corporate returns.
The new findings are an exclamation point on the end of an argument that economists, lawmakers, and activists have been making for years: the systems corporate America uses to link CEO pay and company performance are badly broken. CEOs make about 300 times what their workers do, and routinely collect performance-based bonuses even when their performance fails to meet targets. Over a third of the best-paid chief executives of the past 20 years have ended up getting bailed out by taxpayers, booted from their posts by the board, or busted for fraud. Several of the men who held key CEO jobs in the run-up to the financial crisis walked away with fortunes that measure in the hundreds of millions of dollars.
Worse, everyone who pays taxes is helping to pay CEOs their performance-based incentive compensation. Stock compensation is tax deductible under the current rules for executive compensation and corporate taxes. The taxpayer tab for incentive payouts to a handful of Walmart executives in just the last five years comes to $104 million. The overall public cost of the loophole is roughly $5 billion per year, according to a pair of Democratic senators who want to close it.