Another Failed CEO Pay Experiment

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.

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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.

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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.

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As always, I want to know what’s on your mind. Tell me what you think about today’s subject, or about any of our recent subjects, by leaving a comment on our website or by sending me an e-mail.

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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,

Brad Hoppmann

Publisher

Uncommon Wisdom Daily

Your thoughts on “Another Failed CEO Pay Experiment”

  1. Sorry Brad, but your comment “CEOs don’t manage a company so that they can make sure they get paid a lot of money.” is just TOTALLY false! These guys have compensation consultants that come in and design compensation plans around meeting FINANCIALLY ENGINEERED metrics that are simple to meet. You do not have to be a rocket scientist to figure out that if you buy back your shares, you can artificially boost EPS. And as long as EPS is the main metric of your compensation, you can make a ton of money. Of course, don’t make top line revenue a key metric because that is too hard to achieve. That takes investing in sales people and innovation and hard work to support the client. No, no, no, simply cut costs, factories, people, compensation, benefits, sell divisions, etc. etc to artificially boost net income and then do BILLIONS and BILLIONS of dollars of share buybacks to artificially boost Earnings Per Share. Then tie MOST of the CEOs compensation to those metrics, and you can see why the average Fortune 100 CEO makes over 500 times the average working stiff’s salary..Lord knows, its a total joke and you have drunk the cool aid on this one…

  2. CEO & Board make it impossible for him to fail by setting short term goals for great financial rewards. Board members usually are on other Boards as a CEO which also game this same set up for investors to FAIL to get their fair and just rewards.

    EASILY resolved by Caping Max Amout a CEO can get in a Goal YEAR by 50%.
    Also important to retain part of this Bonus as a 50% Stock Reward not redeemable until a a minimum of 5 years at current market value. By doing this, is to reach long trem financial goals as well as short term goals which hurt stock holder value.

  3. If these execs are worth so much , let them start their own company and keep it private !!!

    But NOOOOOOOOOOO , they are taking the true owners [stock holders] for an expensive & abusive ride !
    And costing the consumers more then needed !
    [or losing the sale all together ! ]

  4. Cornell is a totally labor union dominated university. Of course their study shows the exec pay is just excessive. Naturally, liberals have no problem with actors getting $15 mil for a few months ” work” with no responsibility for decision making . They give to Democrsts. And God forbid anyone questioning a politician getting a $8 mil advance for a book that will be ghost written about them. Let’s get over other people doing better than you and I. Take responsibility for your station in life, quit complaining about how unfair it is and get about your business. Getting a lot of people to agree that exec pay is unfair may make you feel like your lack of success isn’ t your fault, but, it will not improve your standing.

  5. Unless you are a shareholder, it is none of your business what executives of non-government or non-quasi-government or non-government-protected companies – listed or unlisted – make. If you are just a customer and think this drives up your prices, go elsewhere. If you are a shareholder and cannot persuade a sufficient block to make changes, go elsewhere. If you are concerned about management salaries at government-protected companies, such as the big banks, blame the voters – perhaps yourself, your parents, your grandparents, great-grandparents, etc. included – for their rotten selections of politicians.

  6. Then maybe it is time to enact a new tax bracket called “suck up the excess” TAX. 70% seems about right to me. Sure, anything over 1.5 times TSR give it to your favorite uncle, Sam. What say you Mr. Dimon?

  7. Brad, I think you right that it’s a waste of energy to envy CEO pay. A great piece of advise that I received, coincidently came from a CEO. His company was purchased by a private equity firm. The Principals in the private equity firm made huge sums of money. The CEOs advice was: instead of envying people making huge sums of money, why not figure out how to be more like them?

  8. You cite an article that claims there is no evidence that TSR programs do not lead to better firm performance. You then argue that CEOs may not be motivated simply by their own bottom lines. Huh? isn’t that the whole point of being a CEO, and being paid the big bucks? To stockholders, the bottom line IS the measure of executive success, and if the CEO can’t deliver, they’ll find one who will.

    Another conclusion one could draw from the same evidence is that there is that the CEO really has very little control over the bottom line. If that is the case then one could draw the opposite conclusion: that huge salaries for CEOs are not warranted.

    Thomas Pickety has an interesting discussion on this topic in his book. Of the developed countries, only the US and UK have executive salaries that are far higher than the average worker. But since companies in the US and UK don’t seem to be earning so much more than companies in the rest of the developed world, one could easily conclude that US executive salaries are too high for the contribution being made. If you study the way executive compensation is determined in the US a more logical conclusion is that executives are over paid.

  9. Hi Brad,

    I usually follow, and mostly agree with your comments, but I just had to reply to this article as I feel it misses the point about what is fair. Why should one person, head of a bank for example, make $40-80 million in one year while, the average poor or middle class citizen is struggling to survive on less than $50,000 a year?

    The banks make decisions on derivitive investments, loaning people money to buy houses they can’t afford, providing student loans for college, even for people who will eventually fail, or drop out, etc. all the while knowing the government will bail them out if something goes wrong. I think this is just not right!

    What do you think of pharmaceutical companies buying another company and jacking up the price of a drug 7000%, when they had no R&D costs? I can concentrate on my own problems, but what does a person dependant on a drug do when it happens to him? I am not that person, but I have a strong empathy for a carpenter, or ordinary laborer feeling resentment against our so-called democracy, when they can’t pay for the medicine to keep them alive! Put yourself in their position!

    Charles T

  10. The one big complaint most people have about executive pay is that they get huge rewards for failure, and if they get pushed of the boat they leave with a couple of years salary that would last your average man in the street a life time, and a pension pot that is not deserved, they are in a win win situation they get rewarded for positive results and negative results, Take a look at Fred Goodwin the ex CEO of Royal Bank of Scotland he broke thousands of good business’s put thousands of people out of work, and the grade 1
    prize idiot get a pension and pay off that makes your eyes water, A good CEO moves a company on, for the benefit of the shareholders, and staff, which is something the likes of Fred Goodwin, and Bob Diamond at Barclay’s could never do as all they could do was lie and cheat to the share holders and staff, 99.9% of working people do not get paid for failure, Bring the CEO’s back into the real world and give them rewards for positive results, not manipulated or cheat results. I am afraid that when the next crash comes along the likes of Goodwin and Diamond are going to be joined by a few more CEO’s who you would not trust to run a candy store.

  11. I have one additional comment. It is interesting to see high level company officers go from firm to firm, regardless of success or more likely, lack of success (not always failure). It seems that boards are too interested finding someone who is “safe” and won’t rock the boat than in finding someone who will lead.

  12. This is an interesting subject and unfortunately it often becomes too emotional. People forget that the owners, i.e. the shareholders, are ultimately the ones who pay for the compensation, through the board of directors. If the owners are complacent, then abuses will happen and WILL continue.

    Perhaps a bigger issue, albeit one less talked about, is the whether the board members are doing their jobs and this encompasses the approval of compensation. They too can receive very large payouts given the number of hours “worked.” Sometimes I think the C level staff and the board members have an incestuous relationship.

  13. Yes, exorbitant salaries are a bit over the top in comparison with the average wage earner, but then that is a subjective call about what is fair and who is calling the “fairness” shot. While I understand the gravity of the discrepancy in wages, subjective calls are what happens in socialist countries where the government makes the decision about what is “fair”,…. usually taking from the rich and giving to the poor where the politicians spend other people’s money (yours and mine) in order to get elected over and over again…until the money runs out and there is a huge correction. Does any of this sound familiar? Just in case, and in the case of the United States, we are $19 trillion in debt, and guess who is on the hook? Need I say any more about the slippery slope of subjective thinking?

  14. Bottom line…..no human being running anything deserves more than or is worth more than $5 million per year. It’s a symptom of what is wrong with our society. No Mr. Gekko…..greed is not good!

  15. How about the thought that no salaried individual can ever earn $112 million/year? Jamie Dimon gets paid that, sure, but he’s still just an employee – does he really do as much work as about 1000 other employees? If he took $12 million/year instead, at which level he’d still be a rather wealthy lad, what impact would the $100 million/year have on, say, shareholder dividends?

  16. I am not jealous of persons who form companies, make products the public wants to buy, and make lots of money out of their success. Paying executives huge salaries has to add to the price of products and does not enhance company values. Excessive salaries are like a brake on corporate efficiency and cost us more in consumer prices.

  17. I am very conservative. Having said that, I am sickened by the amounts of money these CEO’S are making. I believe in free market (which we don’t have). I am also a very spiritual person. I believe in personal responsibility and hard work. I do not favor victomhood. I also am reasonable and know that these corporate mangers are not THAT much sparter than the rest of us,. I know they think they are, but they are not…. I am looking to the day that we all realize we are brothers and sisters. Profit is important but is it more important than people? I don’t think so. It is challenging and I fear not too many executives are up for the challenge of loving their fellow man above profit. So, keep praying!!!!

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