Tuesday, 11 June 2013

Executive pay – because you’re worth it

You know those excuses for the obscenely huge amounts of money handed over to company chief executives? It’s a reward for high performance and all that? Turns out to be complete bollocks.

Here’s the abstract of an academic paper published earlier this year, Performance for Pay? The Relation Between CEO Incentive Compensation and Future Stock Price Performance:
We find evidence that CEO pay is negatively related to future stock returns for periods up to three years after sorting on pay. For example, firms that pay their CEOs in the top ten percent of excess pay earn negative abnormal returns over the next three years of approximately -8%. The effect is stronger for CEOs who receive higher incentive pay relative to their peers. Our results appear to be driven by high-pay induced CEO overconfidence that leads to shareholder wealth losses from activities such as overinvestment and value-destroying mergers and acquisitions.
[With thanks to David Grace for spotting this.]

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