There aren’t many issues in business that get people more fired up than that of executive compensation.
Whether it’s the populist left, the populist right or just those of us with a well-developed sense of fair play, the idea of some corporate CEOs making massive sums of money — particularly relative to the average worker — gets peoples’ justice meters spiking into the red zone.
To some extent I can understand this emotional impetus.
After all, we know we work hard at our respective jobs, and hopefully we feel like we’re at least coming close to being fairly compensated for our efforts.
Then we read about the CEOs pulling in north of $60 million, $80 million and even $112 million in a year, as was the case in 2014 with Liberty Global (LBTYA) CEO Michael T. Fries. And it just rubs us the wrong way.
JPMorgan CEO Jamie Dimon always gets a huge slice of executive pay.
Gargantuan paychecks like this, and the distastefulness they engender among the public, are reasons why there’s been an overwhelming outcry over how much more CEOs make than their workers.
In August, we wrote about that outcry and the steps the SEC was taking to require that companies release ratio data on CEO pay to their median workers.
Another tactic promoted by corporate America to try and align CEO pay with shareholders was to offer CEOs a bonus for boosting shareholder returns. This compensation plan is known as a total shareholder return plan, or TSR.
Yet a new study by researchers at Cornell University shows that this tactic just doesn’t work.
According to a story appearing in Yahoo! Finance, the Cornell study, which was conducted in conjunction with consultants Pearl Meyer & Partners, examined a decade’s worth of data from every company in the S&P 500.
The study concluded that companies that offer TSR plans to executives don’t show any outperformance in shareholder value when compared to companies that don’t do TSR.
Wait, did this study really just essentially debunk the widely accepted thesis that — if CEO pay is directly tied to shareholder returns — then those CEOs will perform better than those whose pay isn’t tied to shareholder returns?
Yes, that’s what the study showed.
In fact, here’s a direct quote from the study written by Hassan Enayati, Kevin Hallock and Linda Barrington of Cornell University’s Institute for Compensation Studies:
There is no strong evidence of a positive impact of TSR plans on firm performance.
In an interview with Yahoo! Finance, Enayati said:
Despite the fact that just under 50% of S&P 500 firms have this pay metric as part of their executive compensation plans and that this pay metric is designed to align the interest of shareholders and executives, we find that there’s no relationship between the pay metric and top-line business outcomes like 1-, 3- or 5-year total shareholder return, return on equity, earnings per share growth, or revenue growth.
What this tells me is something I’ve long suspected about CEO pay, and indeed about human behavior. That is, most CEOs aren’t motivated simply by their own bottom lines.
I know this may sound unconventional, but providing the uncommon wisdom on issues such as these is part of our namesake.
What I think matters much more for most CEOs is not just their own pay, but rather the need to accomplish their goals … the need to matter … and the need to be victorious.
In other words, CEOs don’t manage a company so that they can make sure they get paid a lot of money.
It’s more like CEOs manage a company with designs toward success. And that this is how, ultimately, the really big paychecks come in.
Think about it like this. Most of us love to do things for people. Yet before we can do things for others, we have to be the type of person who is capable of getting things done.
This principle is true for our personal and family lives, as well as for CEOs in their roles as captains of corporate ships.
One other food-for-thought takeaway here is that I think we all need to fight our natural tendencies toward envy and jealousy over what other people are being paid, or the success that other people are having.
Focusing on what we can accomplish ourselves instead of what others have is one of the keys to happiness in life.
So, whether it’s your neighbor’s new car, or Jamie Dimon’s weekly paycheck — it’s better to worry about your own lot in life, and not to get absorbed in the lives of others.
Remember that life is not fair. Some people will earn more money than others. Some people are naturally better at some things than others. This is just reality, and no amount of legislation, rules, fancy compensation schemes, etc., is going to make that change.
Instead of fighting this fact, I say embrace it — and find your own personal path to success and happiness.
Elsewhere in the news today …
U.S. stocks enjoyed yet another strong day, with the Dow closing up more than 300 points, or about 1.9%. Strong gains in European stocks, as well as hopes that interest rates will remain low for some time, helped fuel the day’s buying.
• BP (BP) will pay $20.8 billion to settle civil suits from the federal government and five states for damages from the 2010 Gulf of Mexico oil spill.
• Treasury bond prices fell Monday, pushing yields to their largest one-day gain in two weeks.
• Gold prices jumped Friday on the downbeat employment data, and easing expectations of an interest-rate increase this year by the Fed.
• Oil futures jumped to their highest level in nearly two weeks. Expectations that China may implement more economic stimulus helped oil to rally 1.6%.
• Walt Disney Co. (DIS) is considering a "peak" pricing program to alleviate crowding during the park’s busiest days. Whether that means cheaper ticket prices or more benefits for those who visit on off-peak days remains to be seen.
Good Luck and Happy Investing,
Uncommon Wisdom Daily