A new study by MSCI Inc., has discovered that companies that pay out higher salaries to CEOs are not necessarily the best performing. Historically, companies have tied executive pay to financial performance and stock market results.
The study is refuting that notion, as evidence shows that this compensation structure causes CEOs to engage in short term strategies that will reflect exaggerated successful company performance.
The study comes as the latest addition to an ongoing debate between researchers and executive-pay professionals on how effectively companies have been able to link pay and performance. It is common practice that companies offer CEOs attractive pay packages that also include stock options and large bonuses.
Advocates of the pay for performance strategy argue that giving executives stock options and performance related bonuses, will result in the executive having a personal interest in the company and its success.
Opponents argue that in cases where executives have personal interests in a company, and the potential for massive payouts, would result in a tendency for the CEO to engage in short-term thinking strategies that will be costly to the company in the long-term.
MSCI Inc. compared stock market returns of 423 US companies over a 10 year period from 2006 to 2015. The findings of the study suggest that high earning CEOs performed worse than those who earned less.
The study assumed that all dividends were reinvested back into the stock, and all companies studied had one CEO during the 10 year period. Compensation was defined as the total payout amount received by executives after receiving rights to restricted shares and exercised stock options.
An earlier study conducted by MSCI had shown that the correlation between performance and compensation at the time was very poor. This prompted companies to increase compensation to CEOs by granting them options and restricted stocks. The study noted that during three and five year periods, there was a close correlation between payouts for executives and company performance.