A damning new report released by corporate research firm MSCI revealed the highest paid CEOs tend to run the least profitable companies, suggesting executives are not worth their staggering paychecks.
Corporate salaries have become a hot-button issue in the United States after an entire generation was mobilized to view successful businessmen in the same vein as terrorists by the likes of Occupy Wall Street and other groups. The rise of leftism in America aside, there is a harsh truth in MSCI's report investors cannot ignore - corporate executives are not paid based on their performance. Businesses should not be viewed as virtual ATMs by the people that run them, but rather as long-term investments. CEOs must be willing to make personal sacrifices, and that means occassionally accepting a pay cut.
Report Calls For Greater Scrutiny of Pay For CEOs
Corporate research firm MSCI examined the salaries of 800 CEOs at 429 large and medium sized businesses in the United States for their report titled "Are CEOs paid for their performance? Evaluating the Effectiveness of Equity Incentives".
The study found that a $100 investment in companies with the highest paid CEOs would grow to $265 over 10 years. By contrast, the same investment would grow to $367 in companies with the lowest paid CEOs over the same time period.
"Equity incentive awards now comprise 70 per cent or more of total summary CEO pay in the United States, based on our calculations. Yet we found little evidence to show a link between the large proportion of pay that such awards represent and long-term company stock performance," the report says.
The study's authors add: "Even after adjusting for company size and sector, companies with lower total summary CEO pay levels more consistently displayed higher long-term investment returns."
MSCI recommends companies to shift their focus away from annual reports to long-term performance, and pay closer attention to the relationship between CEO pay and performance over long periods of time.
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So what needs to change? MSCI is suggesting that the SEC rethink the way pay is reported to include the long haul. That's a good idea. But we need to go further, and rethink whether buybacks should be illegal, and whether CEOs (or other executives) should be compensated in stock options that encourage them to focus more on share price than on other metrics.
CNN Money says investors should take note
Investors should be wary of CEOs that take home excessive paychecks and bonuses...The report found that average shareholder returns over the decade were 39% higher when a company's CEO was in the bottom 20% of earners compared to a CEO in the top 20% of earners.
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At a time of heated national debate about growing wealth inequality and excessive executive compensation, the report's authors call for executive pay to be better-aligned with performance. They also call into question the view among corporations that generous pay packages, particularly the huge stock incentives, help recruit celebrity-level talent and drive company performance.