Ruminations on CEO pay and its link to company performance

Originally circulated on 12 June 2020

Hi fellow Ruminants & Groupies in Lock Down Level 3

Greetings from  day 77 of lock down. During the course of this week one of my colleagues (who shall remain nameless) alerted me to an intriguing  and seditious piece of research on the topic of whether CEO pay correlates with company performance. This is an extremely suitable topic for  Ruminant Pink Friday’s ™.  

This research was performed by one of our colleagues, Anup Parshotam as part of his MBA studies. For those diligent few among you this is available upon request. This is a pretty comprehensive piece of research looking at 135 companies on the JSE from 2010-2018 using published results and a statistical analysis. This is quite a dense report but I quote this conclusion:

These results indicate a relatively weak relationship between CEO remuneration and company performance. Of particular concern are company performance variables, for example, Total Shareholder Return (TSR), that are negatively correlated to CEO remuneration.

The research also looks at CEO remuneration and the company life cycle defined in the categories of Young, Growth, Mature and Decline. The results show that as the company’s progress through the stages CEO pay increases through the life cycle stages with companies in the mature and decline phases having the highest pay. You don’t want to work for a young or growing company if you want to maximise your pay.

Anup’s research is for South African companies but he includes an extensive literature review suggesting that executive pay is distorted in many companies all over the world. I have included just one of his references on the managerial power theory of executive compensation . https://web.b.ebscohost.com/abstract?direct=true&profile=ehost&scope=site&authtype=crawler&jrnl=15371816&AN=87379371&h=AbBk46JDNTcEzYjr9cmQJ5vTVMXNhP%2bJ9VbH31P1IuLLzH07vOqiO7YdnM6ilaUiZQsNOBfv51X6dKcij2nyqA%3d%3d&crl=c&resultNs=AdminWebAuth&resultLocal=ErrCrlNotAuth&crlhashurl=login.aspx%3fdirect%3dtrue%26profile%3dehost%26scope%3dsite%26authtype%3dcrawler%26jrnl%3d15371816%26AN%3d87379371

In addition the Economist has published a study on CEO pay in America. Like RSA CEO pay has little to do with performance and keeps growing way faster than inflation. Nice work if you can get it. https://www.economist.com/business/2020/07/11/how-ceo-pay-in-america-got-out-of-whack.

Please keep the submission ideas flowing.

Regards

Bruce