The More You Pay a CEO, the Worse He Does at His Job
Why do CEOs get paid fat bonuses on top of multi-million dollar salaries? Listen to a Wall Street insider and he’ll tell you that you have to pay “talent” the big bucks to get them to do a good job. On the contrary, new research out of the University of Utah demonstrates that the companies that pay their head executives the most actually perform more poorly, reports Forbes.
The data showed that companies in the top 10% for executive compensation produced 10% smaller returns for their investors over the following three years. The difference is even more pronounced if you look at the even more elite CEOs. Companies led by the top 5% of earners secured 15% less for shareholders than their industry peers, on average.
That conclusion partially makes sense. There must be a point somewhere between a $2 million paycheck and a $30 million paycheck where the money is so obscenely large anyway that it has little influence on the job performance. For that reason, it wouldn’t surprise me at all to discover that highly paid CEOs did equally as well as their lesser paid peers. However, the fact that the highest paid CEOs were actually leading the least successful businesses of the bunch – that would indicate that there’s more at play.
“[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.”
Certainly, it doesn’t help that these CEOs generally already have enough personal wealth that they don’t actually have to work another day in their life. Keeping their jobs isn’t critical for them. Furthermore, the knowledge that their colleagues get paid insane amounts regardless of their performances and that there are golden parachutes in the wings allows them to worry less about the outcome of their own decisions.
Since the study examined CEOs over the period of two decades, researchers were also able to look at the effects of retaining an underperforming but overpaid CEO. The longer they were in their position, the more control they had to continue making unprofitable decisions.
How could large financial companies reverse this misfortune (supposing you felt bad for them in the first place)? For starters, businesses could link executive pay more closely with performance, including only awarding bonuses when merited rather than as an automatic gesture. Regardless of how it’s handled, the solution obviously isn’t just to pay someone else more in the hopes that they’ll do a better job.
In fact, it might be time for large companies to reconsider paying executives that much altogether. If it doesn’t yield results, what is the point anyway? There’s got to be a better reason than simply spreading the class divide.