By Sahid Fawaz
CEOs love to pat themselves on the back for their outlandish compensation.
But more and more data shows that CEO pay isn't based on performance, business genius, or extraordinary leadership.
"The compensation packages of the chief executive officers of America have been rising faster than just about any rational metric upon which they are supposedly based. 'CEO pay grew an astounding 943% over the past 37 years,' according to a recent Economic Policy Institute analysis. EPI further observes this was a far faster growth rate than 'the cost of living, the productivity of the economy, and the stock market.'
CEO compensation isn’t the pay for performance its advocates claim. Instead, it is unmoored from any rational basis. This makes it an inappropriate wealth transfer from shareholders to management.
You can place much of the blame on compensation consultants and the corporate boards that hire them. Boards are supposed to act on behalf of shareholders when they are considering the pay packages created by the former. But the relationships are riddled with conflicts that produced the charade we have today.
. . . The results are rather startling and confirm what some of us have long suspected: The most overpaid CEOs actually destroy shareholder value. To quote a Harvard Law School study:
'The 10 companies we identified as the most overpaid firms as a group underperformed the S&P 500 index by a gaping 10.5% and actually demolished shareholder value as a group with –5.7% financial returns.'
. . . [T]he reality remains that shareholders are paying executives big bucks for simply keeping a chair warm during a bull market. That isn’t performance-based pay; it’s dumb-luck-based pay."
For more on this topic, read the full article at Bloomberg.