High CEO pay = low returns

Filed in archive executive pay on January 3, 2010

We've all heard the arguments justifying soaring CEO pay. They say it's all about motivating, recruiting and retaining talented executives. Otherwise they will go elsewhere.

A new study Performance for pay? The relationship between CEO incentive compensation and future stock price performance from academics at the University of Utah and Purdue University show that's just crap.

The researchers looked at 1500 companies that extended incentive compensation to their CEOs between 1994 and 2006, and then looked at the performance of those stocks. They found that the shares of the highest paying firms tended to under perform and that this performance deteriorated over time.

The researchers suggest it might be a case of over-confident managers accepting large amounts of incentive pay and investors then over-reacting to these pay grants and selling out, driving the price down.

What's clear however is that high executive pay does not necessarily deliver better returns. As the researchers say: "Our results suggest that managerial compensation components such as restricted stock, options and long-term incentive payouts, that are meant to align managerial interests with shareholder value, do not necessarily translate into higher future returns for shareholders."