I have already discussed the issues with inflated CEO compensation. One primary cause driving compensation upward is that many firms employ a technique that insures that he (it is typically a he) gets salary increases regardless of the performance at the firm. I have also discussed the problem that executives are paid ridiculous multiples (not 10 to 50, but 250 to 500 times) of the average pay at their firms.
Now, four professors (Drs. R. Banker and J. Plehn-Dujowich of Temple; M. Darrough and R. Huang of CUNY) have examined the correlations between past performance and CEO compensation. Their article is published in the Accounting Review. To examine their premise, they employed data that predates the Great Recession; in particular, they examined the date of the period from 1993 to 2006.
Their data indicated that one’s salary is positively associated with past performance- at least for those CEO’s who have been in the same position with the same company. On the other hand, their bonuses (which tends to be the bulk of their compensation) is negatively associated (i.e, one is awarded a higher bonus for lower corporate performance) for those same individuals.
On the other hand, for those CEO’s who transferred from one entity to another, their salaries were clearly related to their performance at their previous affiliation, but unrelated to that of their current employer. Furthermore, his (or her) future performance was found to correlate to their current salary- but again, not the bonus portion of their compensation. As their tenure increased, their salary was more closely correlated with the performance of their current employer and less related to that of their previous affiliation.
One final consideration in their study was the examination of the compensation-performance relationship for those CEO’s who transferred to other firms within in the same industry. Their salaries and performances were greatly influenced by their performance at their old company. This further bolsters the results presented by Elson and Ferrere that CEO skills are highly related to their industry and institutional history.
Maybe now is the time to cut those ridiculous bonuses and insure that total executive compensation and corporate performance are, indeed, totally correlative.
I have very little of value to add to this, but give me a 1/3 of the salary and I’d do at least as well as some of these blokes. In fact, I might start advertising…”Need a company run into the ground? I can do it at 1/3 the cost you care currently paying” That will be an attractive pull tab on the cork-board.
Lisa Brandel recently posted..Dragonfly In Blue by Lisa Brandel
Thanks for that great laugh, Lisa! Maybe HP will take you up on it!
Wow! Hard to relate!
Carolina HeartStrings recently posted..ANTIQUES – ELIZA, THE MAKING OF A LADY
These numbers do seem astronomic, don’t they, Alessa?
I know that these executives have a great deal of responsibilities, but the bonuses really do seem ridiculous to me. This explains why the consumers continue to pay higher prices for mediocre products and services.
Janette Fuller recently posted..Book Review: Chronic Marketer by Brad Gosse
That is the key point, Janette. We can understand the salary; that seems to be relatively commensurate to their effort and ability. However, the bonuses, especially when many of these same executives are trying to penny pinch the employees salaries down, make no sense whatsover.
I came across this when i worked in the music industry. It was seemingly awash with money during those years, (before the digital age), and executives would often go from one company to another, on either side of the ocean, getting let go time after time, but being handed huge amounts of money! It was mind boggling back then, and still boggles now!
The Great Gordino recently posted..Sticking My Oar In To Try Something New!
Yes, it would be nice if there were some correlation between performance and compensation, Gordon!
Thanks for the visit and the comment.
I was not aware about such things. Such a high compensation for the executive class, is way too much. Thanks for throwing light on this aspect.
Glad to oblige. Thanks for visiting!
I’m surprised! It’s almost like a dictatorship. No one else seems to know how much they’re making and why. =) These studies are super informative, so we don’t run the risk of crazy dictators in offices.
Samantha Bangayan recently posted..Family and Faith
I’m less worried about dictators in corporate positions (not that they don’t sometimes operate that way) than I am when CEO compensation sucks all all the available cash in an entity that can’t be shared among the valuable people that make that company viable, Samantha!