Saturday, December 26, 2009

Excessive CEO Pay Correlated With Decreased Stockholder Returns -- Two New Studies

The Wall Street Journal is running an exellent roundup -- on "Top Five Officer" payscales, and in the process, has highlighted two new studies -- one by a Harvard law professor; the other from Purdue's biz school. Both point to the conclusion that excessive officer pay is inversely correlated with total stockholder returns, in future periods.

Confidential Note to Hans Becherer (ex-compensation committee chair of the board, file photo at left) -- Do you now see yourself, when paying CEO Fred Hassan, and his merry band of thugs and robber-barrons, over at Old Schering-Plough, in these results? You should. SGP was wiped from the face of the Earth, due in large part to these excesses. The execesses motivated destructive behaviors. To the Journal, then -- but do go read it all:

. . . . It turns out that the bigger the CEO's slice of the pie, the lower the company's future profitability and market valuation. "These CEOs," says Prof. Bebchuk, "seem to be trying to grab more than they should."

Finance professor Raghavendra Rau of Purdue University and two colleagues looked at CEO pay and stock returns for roughly 1,500 companies per year from 1994 through 2006. They found that the 10% of firms with the highest-paid CEOs produce stock returns that lag their industry peers by more than 12 percentage points, cumulatively, over the next five years.

Companies at the top of the pay pile, Prof. Rau concluded, award their CEOs an annual average of $23 million—but leave their shareholders poorer (relative to other companies in the same industry) by an average of $2.4 billion per year. Each dollar that goes into the CEO's pocket takes $100 out of shareholders' pockets. . . .

Indeed -- some empirical proof of what has felt intuitively obvious, at least to me, for several years now.


Anonymous said...

Would be interesting to see where SP and Pharmacia fall out in the distribution of these 1500 companies.


condor said...

It would, indeed be, Salmon -- thanks.

It is certain that, from 2005 to late 2007, Schering's CEO Hassan made about twice, all in, what Merck's CEO made -- despite the fact that Merck was almost twice the size of Schering-Plough.

And Hassan's pay was beyond the magic 35% border mentioned in the above study. I'll go look for data on old Pharmacia CEO pay.



condor said...

So, here is Fred Hassan's last full year at Pharmacia (pages 73 and 74):

. . . .As a result of Mr. Hassan's efforts in overseeing strong financial results in 2001, the Board adjusted Mr. Hassan's 2002 base salary from $1,400,000 to $1,470,000, and his target incentive compensation award for 2002 to $1,837,500.

All performance objectives established for Mr. Hassan's 2002 incentive compensation -- growth in revenue, growth in earnings per share and individual performance -- were exceeded. As a result of this superior performance, the effective spin off of Monsanto, the successful negotiation of the pending acquisition with Pfizer on behalf of the shareholders and his important contributions in representing the Company and the industry to external audiences, Mr. Hassan's actual incentive payout for 2002 was $3,005,600. . . .

So, that is plainly beyond the 35% threshold, for Pharmacia.

And, like Schering-Plough, Pharmacia has been wiped off the face of the Earth.

Pattern-forming, here, anyone?


Anonymous said...

it was then, and recently with S/P, about formatting the company for 'a sale.'

Very sad~

professor cz said...

Many Executive’s are aware of the problems associated with performance appraisals and they avoid them. In 2005, the Securities and Exchange Commission began requiring companies to explain the review process for executives and identify performance targets used to calculate incentive pay, like bonuses. Under the rule, companies were supposed to divulge performance benchmarks — for example, growth in earnings per share — and why they were chosen. Companies were also supposed to detail the range of performance under which incentive payouts would be made, and the corresponding payout percentages. However, this not happen. Many companies simply did not bother to comply with the rules, and outright rejected making public pay for performance. According to 2007 proxy filings, only 47 percent of corporations made the required disclosures concerning short-term incentive pay for their executives. Corporations continue to fight disclosure, and offer a wide range of excuses as to why pay for performance should not apply to their executives. With the fiscal crises of 2008-9 the percentage of corporations refusing to file disclosures dramatically increased. Executives maintained that the performance review is only for their underlings, not for them. This is sheer folly, an employee’s performance that is the easiest to assess is the CEO.

Anonymous said...

nice post. thanks.