What's CEO pay got to do with company performance? Not much

Long-term analysis of incentive pay data among U.S. companies finds strongest returns among worst-paid chief execs

What's CEO pay got to do with company performance? Not much

Critics accusing public companies of overpaying their top executives for middling-to-poor performance now have more ammunition based on new research from MSCI.

In a new blog post, Harlan Tufford, vice president of MSCI Research, shared the results of a study in which the firm looked at CEO pay over the entire tenures of 235 CEOs in the U.S. who served between 2006 and 2020.

Focusing on incentive pay, the research looked at both awarded pay, which measured the estimated or target value of equity awards, and realized pay, which uses the actual take-home value a CEO was able to get from the equity they received. Assessing both values, Tufford said, allowed researchers to compare what companies’ board of directors intended to pay the CEO and the actual payout, with non-equity pay being treated the same in both cases.

“[W]hile the best-performing CEOs (the top fifth of our sample, based on annual average total shareholder return) earned 70% more in realized pay than the worst-performing CEOs, they earned only 4% more than CEOs who oversaw average corporate stock performance, relative to our sample and on an annual average basis,” he said.

Counterintuitively, the results also showed that CEOs who oversaw the strongest returns in the sample had the lowest awarded pay.

MSCI’s previous studies had also uncovered evidence of misalignment between CEO pay and company performance, Tufford noted. But because previous approaches focused on pay and performance over shorter terms – specifically, fixed 10-year time frames – he said they overlooked the fact that “boards don’t pay an amorphous, corporate entity that never changes jobs.”

The most recent study, he said, revealed slightly stronger levels of alignment between realized pay and company performance compared to past studies, though the overall relationship was still weak.

Proxy-disclosure standards in the U.S. do not mandate a multi-year review of pay awarded to and realized by CEOs over their tenure, Tufford noted. He suggested that the lack of such information has traditionally prevented substantive analyses of pay-for-performance, which MSCI sought to fill with by analysing publicly disclosed data and company performance.

“In doing so, we found that boards, on average, failed to pay for performance,” he said. “Rather, the evidence suggests that companies with only average performance paid up for mediocrity.”


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