The title of CEO brings visions of a gluttonous capitalist, a greedy leader who makes decisions based on balance sheets and the boardroom’s temperature, and earning gobs of money plus stock options for their “talent” and brawn. While conventional wisdom says that successful companies pay their head executives multi-million dollar salaries, new research finds that the more organizations pay their CEOS, the more they perform poorly and hinder business.
New data from the University of Utah shows that execs in the top 10 percent for compensation produced 10 percent smaller returns for their investors over the a period of three years. According to care2.com, the difference is even more pronounced if you look at even more elite CEOs. Companies led by the top 5 percent of earners secured 15 percent less for shareholders than their industry peers, on average.
“[The highest paid CEOs] ignore disconfirming information and just think that they’re right,” said Michael Cooper, a lead author on the study. “That tends to result in over-investing — investing too much and investing in bad projects that don’t yield positive returns for investors.” Cooper added to the Utahpulse.com that it’s well documented by academic research that businesses are ‘racing to pay their executives more and more.’
In his report “Performance for Pay? The Relation Between CEO Incentive Compensation and Future Stock Price Performance,” Cooper and his colleagues found that paying CEOs more money can embolden them in bad ways. Vocativ’s Daniel Edward Rosen writes that it can create arrogant CEOs who make poor business decisions, like putting money into bad investments or agreeing to “value-destroying” mergers and acquisitions.
What is the solution? Cooper says to impose a higher tax rate for firms that have disproportionate CEO-to-worker compensation. He adds that companies should cease the so-called “golden parachutes” and impose punitive measures such a cut down in pay due to poor performance. Additionally, he contends businesses need to re-examine executive compensation that serves in the best interest of their business.