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Lavish CEO Pay Has Virtually Nothing To Do With How Well A Company Performs

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"Lavish CEO Pay Has Virtually Nothing To Do With How Well A Company Performs"

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CEOs like to justify their sky-high pay by saying it rewards their work in steering companies toward better performance. But a new analysis doesn’t give much evidence to back that up.

Equilar, an executive compensation consultancy, compared the salaries of 200 highly paid CEOs to their companies’ performance based on things like profitability, revenue, and stock return. Rather than showing a clear trend line linking pay and performance, the data is scattered. In fact, chief executive pay is only 1 percent based on stock performance, with 99 percent based on other things entirely.

Here’s how it looks when Equilar compared stock return to CEO pay for 200 CEOs:

Screen Shot 2014-07-23 at 8.21.06 AM

As Bloomberg Businessweek notes, “The comparison makes it look as if there is zero relationship between pay and performance.”

Indeed, even when companies boast that they tie executive compensation to company performance, the country’s largest companies routinely game those systems to ensure they get their bonuses and payouts, such as setting targets so low as to be meaningless or fluffing up their reported profits. In one example, Walmart US CEO William Simon was only supposed to get a $1.5 million bonus last year if net sales grew by 2 percent, but he got it anyway when sales only grew by 1.8 percent because the company calculated “adjusted” sales at the necessary rate. Worse, out of the highest-paid CEOs over the past 20 years, nearly four in ten were fired, caught committing fraud, or oversaw a company bailout. Incompetence doesn’t stand in the way of a big payday.

There’s even evidence that paying chief executives lavishly can backfire. Shareholders at the companies that pay their CEOs the most get the worst results, with an average shareholder loss of $1.4 billion. That’s because exorbitant pay breeds overconfidence, leading to bad decisions about weak performance.

None of these findings have kept CEO pay in check. Median chief executive pay jumped above eight figures for the first time last year, hitting $10.5 million. The average pay package was $15.2 million, a 21.7 percent increase since 2010. Workers’ compensation, on the other hand, actually fell during that period, and the ratio of CEO pay to worker pay was 295.9-to-1 last year. Over the last 30 years, chief executive pay has risen 127 times faster than worker pay despite the fact that workers’ productivity has kept increasing.

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