Tags: CEO | pay | performance | Cooper

Study: Highest-Paid CEOs Perform the Worst of All

By    |   Wednesday, 18 June 2014 11:20 AM

Wave goodbye to the theory that top pay guarantees top performance. The highest-paid CEOs are also the worst performers, according to academic research cited by Forbes.

The study shows that CEOs who get paid huge amounts become overconfident and tend to think less critically about their decisions.

"They ignore dis-confirming information and just think that they're right," says one of the authors of the study, Michael Cooper of the University of Utah's David Eccles School of Business.

Editor's Note:
5 Signs Stock Market Will Collapse in 2013

"The more CEOs are paid, the worse the firm does over the next three years, as far as stock performance and even accounting performance," he tells Forbes.

Cooper and two professors, one at Purdue Universtity and the other at the University of Cambridge, studied data from 1,500 companies with the biggest market caps. They were surprised to find that the more CEOs got paid, the worse their companies did.

At the very top, the 5 percent of CEOs who were the highest paid turned in the worst company performance — 15 percent worse than the average. Broadening the view a bit, the top 10 percent of highest-paid CEOS turned in company performance's that were 10 percent worse than the average.

The highest-paid CEOs apparently tend to think they can do no wrong, or they would not be entrusted with their position and their pay.

"That tends to result in over-investing — investing too much and investing in bad projects that don't yield positive returns for investors," Cooper explains.

The study finds that among the top-paid CEOs, 19 percent did mergers and those deals resulted in a negative performance of 1.38 percent during the following three years.

"The returns are almost three times lower for the high-paying firms than the low-paying firms," Cooper argues. "This wasteful spending destroys shareholder value."

The study also reveals that the longer CEOs were in their position, the more pronounced was their firms' poor performance. Cooper attributes that to the tendency for CEOs to appoint allies to their boards who are more likely to go along with bad decisions.

"For the high-pay CEOs, with high overconfidence and high tenure, the effects are just crazy," he says. In fact, they return 22 percent worse in shareholder value during three years as compared with their peers.

According to the Economic Policy Institute, average CEO compensation at the largest U.S. companies in 2013 was $15.2 million including stock options exercised, up 21.7 percent since 2010.

The institute found that from 1978 to 2013, inflation-adjusted CEO compensation grew 937 percent, compared with 10.2 percent for the typical American worker. Further, the CEO-to-worker compensation ratio that was 20-to-1 in 1965 hit 295.9-to-1 by 2013.

Editor's Note: 5 Signs Stock Market Will Collapse in 2013

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Wave goodbye to the theory that top pay guarantees top performance. The highest-paid CEOs are also the worst performers, according to academic research cited by Forbes.
CEO, pay, performance, Cooper
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2014-20-18
Wednesday, 18 June 2014 11:20 AM
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