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Subject: The more you pay your CEO, the worse off your company does rss

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Xander Fulton
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Well that's...interesting

Most notably, even when looking beyond base salary and including CEO compensation based on company performance, the numbers STILL don't improve.

Highly-paid CEOs tend to just do very badly for their companies, it seems.
 
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Damian
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The report itself describes the table thusly:

Quote:
Cumulative abnormal returns to the firms that are in the top and bottom deciles of annually ranked excess CEO incentive compensation
distribution over 1994-2011 are plotted in event time. Excess compensation is measured relative to control firms matched on industry and sales. Firms are first sorted annually by their excess CEO incentive compensation. An event is defined as a firm being in the top or bottom decile of the excess CEO incentive compensation distribution in a given year. Returns are calculated in excess of the average return of an industry and lagged-return matched equity portfolios using the following methodology: For every firm that falls into the top or bottom decile of abnormal CEO compensation in a given year, we obtain all other firms with the same industry classification, using Ken French’s 49 industry definitions. These industry peer firms are then sorted by their lagged one year returns to form quintile portfolios. Cumulative abnormal returns (CARs) to the event firms are calculated using the returns to these industry and return matched quintile portfolio returns as the benchmark.
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Dave G
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Misleading, I think, or at least ignoring some realities. Companies that are struggling often seek out top-level CEOs in an effort to boost shareholder confidence, and have to pay accordingly. Also this is typical "highlight" from a study with no further information given from the study authors or anything else--it's pretty clear the article was taken from the abstract, not the paper, given that they basically quote the entire abstract.
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Xander Fulton
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djgutierrez77 wrote:
Misleading, I think, or at least ignoring some realities. Companies that are struggling often seek out top-level CEOs in an effort to boost shareholder confidence, and have to pay accordingly.


Perhaps, but the trend existed over at least 3 more years after the analysis comparison point, which makes you wonder...

If the company WAS struggling, and spent the money for the 'best CEO'... he sure didn't seem to help them, did he? Which makes you wonder if the increased cost was worth it, or really just a desperate attempt to 'boost shareholder confidence' in a 'life support to keep us alive as long as possible' fashion (IE., prevent the shareholders from all bailing and causing the immediate collapse of the company).
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Steve K
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djgutierrez77 wrote:
Misleading, I think, or at least ignoring some realities. Companies that are struggling often seek out top-level CEOs in an effort to boost shareholder confidence, and have to pay accordingly. Also this is typical "highlight" from a study with no further information given from the study authors or anything else--it's pretty clear the article was taken from the abstract, not the paper, given that they basically quote the entire abstract.


I would agree. The companies were probably reaching for turn-around artists, which would skew the results.
 
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J
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Drew1365 wrote:
XanderF wrote:
Highly-paid CEOs tend to just do very badly for their companies, it seems.


I think the President needs a pay cut, too.

The average ratio of CEO compensation to that of rank-and-file workers was 204. The ratio of Presidential salary to median household is 9.4
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jeremy cobert
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Koldfoot wrote:
That is interesting. I can't determine what the x and y axis represent on my phone. I can't tell if the graph is not labeled or another fault.

Please help.


I think his point is that CEO's are the suck !!!!
in reality, the study finds this.

Quote:
Abstract:
We find evidence that CEO pay is negatively related to future stock returns for periods up to three years after sorting on pay. For example, firms that pay their CEOs in the top ten percent of excess pay earn negative abnormal returns over the next three years of approximately -8%. The effect is stronger for CEOs who receive higher incentive pay relative to their peers. Our results appear to be driven by high-pay induced CEO overconfidence that leads to shareholder wealth losses from activities such as overinvestment and value-destroying mergers and acquisitions.


the good news is that as a private firm, these under producing CEO's can be let go. Underwhelming government employee's however are usually set for life.
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Tom McVey
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djgutierrez77 wrote:
Misleading, I think, or at least ignoring some realities. Companies that are struggling often seek out top-level CEOs in an effort to boost shareholder confidence


Yeah, but you'd expect that to improve returns, 'cos some of the poor returns are going to be from bad luck, and some from mismanagement that's relatively easy to correct. A good way to look good in business is to take over from a complete jackass.

The only thing that might be a counterargument to that is if there were creative accounting stunts that resulted in some one-time write-offs or merger went bad for which goodwill had to be written off.
 
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Ken
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djgutierrez77 wrote:
Misleading, I think, or at least ignoring some realities.


I think the "misleading" word is what applies. Take a gander at Damian's quote. The chart reflects "cumulative abnormal returns" and "excess CEO compensation." So this isn't a study of "normal" companies and "normal" CEO compensation. It's designed to examine the outliers for both. Which makes it more likely that there is a CEO working to turn a company around over a number of years with compensation to match.

Don't get me wrong - I think executive pay packages have absolutely gotten out of control. The multiplier compared to either median income nationally or average worker pay has grown to stupid levels. But I think that has more to do with the makeup of boards of directors and the buddy-buddy relationships that executives end up with by being members of different boards. But I doubt that anyone's going to push for real reform for shareholder rights. There's way too much money tied up in that to be safe political turf.
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XanderF wrote:
djgutierrez77 wrote:
Misleading, I think, or at least ignoring some realities. Companies that are struggling often seek out top-level CEOs in an effort to boost shareholder confidence, and have to pay accordingly.


Perhaps, but the trend existed over at least 3 more years after the analysis comparison point, which makes you wonder...

If the company WAS struggling, and spent the money for the 'best CEO'... he sure didn't seem to help them, did he? Which makes you wonder if the increased cost was worth it, or really just a desperate attempt to 'boost shareholder confidence' in a 'life support to keep us alive as long as possible' fashion (IE., prevent the shareholders from all bailing and causing the immediate collapse of the company).



There could be some of that, but there's also the fact that this is measured in terms of short-term shareholder return--that is, a turnaround CEO who comes in, makes some long-term strategic shifts, invests in new business lines, and writes off some empty goodwill from previous bad merger decisions might hurt stock prices in the short term. That doesn't mean they've done a bad job, necessarily.

Also, there's the Obama Bailout Defense™, which is as valid here as it is in terms of the bailout: Sure, this looks bad, but how bad would it look without that CEO?
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Dave G
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perfalbion wrote:
djgutierrez77 wrote:
Misleading, I think, or at least ignoring some realities.


I think the "misleading" word is what applies. Take a gander at Damian's quote. The chart reflects "cumulative abnormal returns" and "excess CEO compensation." So this isn't a study of "normal" companies and "normal" CEO compensation. It's designed to examine the outliers for both. Which makes it more likely that there is a CEO working to turn a company around over a number of years with compensation to match.

Don't get me wrong - I think executive pay packages have absolutely gotten out of control. The multiplier compared to either median income nationally or average worker pay has grown to stupid levels. But I think that has more to do with the makeup of boards of directors and the buddy-buddy relationships that executives end up with by being members of different boards. But I doubt that anyone's going to push for real reform for shareholder rights. There's way too much money tied up in that to be safe political turf.


Agreed on both counts. I don't mean my skepticism of this article to imply that CEO pay is beyond critique. If I was on a board and hiring a CEO I'd want to be pushing a bonus-heavy package that rewards performance to key goals...you know, the kind of thing EVERY OTHER EMPLOYEE OF THE COMPANY has.
 
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Damian
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Koldfoot wrote:
damiangerous wrote:
The report itself describes the table thusly:

Quote:
Cumulative abnormal returns to the firms that are in the top and bottom deciles of annually ranked excess CEO incentive compensation
distribution over 1994-2011 are plotted in event time. Excess compensation is measured relative to control firms matched on industry and sales. Firms are first sorted annually by their excess CEO incentive compensation. An event is defined as a firm being in the top or bottom decile of the excess CEO incentive compensation distribution in a given year. Returns are calculated in excess of the average return of an industry and lagged-return matched equity portfolios using the following methodology: For every firm that falls into the top or bottom decile of abnormal CEO compensation in a given year, we obtain all other firms with the same industry classification, using Ken French’s 49 industry definitions. These industry peer firms are then sorted by their lagged one year returns to form quintile portfolios. Cumulative abnormal returns (CARs) to the event firms are calculated using the returns to these industry and return matched quintile portfolio returns as the benchmark.


That's what the graph represents? That's easier than deciphering Shreve, I suppose.

That's just how it's described in the report. I don't have the background to offer any sort of opinion on it.
 
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jeremycobert wrote:

the good news is that as a private firm, these under producing CEO's can be let go. Underwhelming government employee's however are usually set for life.


Yes, you can let the CEO go, but usually with a golden parachute clause being triggered. (A lot of the microdynamics behind mergers are to trigger the stock vesting in these clauses , BTW.)

Also, the average CEO makes $14 million, about 270 GS-10s.
 
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djgutierrez77 wrote:
Misleading, I think, or at least ignoring some realities. Companies that are struggling often seek out top-level CEOs in an effort to boost shareholder confidence, and have to pay accordingly. Also this is typical "highlight" from a study with no further information given from the study authors or anything else--it's pretty clear the article was taken from the abstract, not the paper, given that they basically quote the entire abstract.


Agree.

Should probably cull data for CEO's in place under 2 years to get a better picture.
 
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Fairly easy to process. You bring in a big named CEO when you're planning on shkrtselling and leveraging assets into debt to canabalize the company for personal profit then default on the debt. If the company started to show positive you couldn't play the game.
 
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Tom McVey
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djgutierrez77 wrote:
If I was on a board and hiring a CEO I'd want to be pushing a bonus-heavy package that rewards performance to key goals.


As an MBA, though, you know that doesn't remove all the principal-agent problems. You (as a shareholder) might want generous golden-parachute clauses so you can get rid of a crappy CEO quickly without them holding the company hostage. Or to prevent them from turning down a good takeover bid because it would put them out of a job.
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djgutierrez77 wrote:



There could be some of that, but there's also the fact that this is measured in terms of short-term shareholder return--that is, a turnaround CEO who comes in, makes some long-term strategic shifts, invests in new business lines, and writes off some empty goodwill from previous bad merger decisions might hurt stock prices in the short term. That doesn't mean they've done a bad job, necessarily.

Dooood!!! MBA, bro!
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jarredscott78 wrote:
djgutierrez77 wrote:



There could be some of that, but there's also the fact that this is measured in terms of short-term shareholder return--that is, a turnaround CEO who comes in, makes some long-term strategic shifts, invests in new business lines, and writes off some empty goodwill from previous bad merger decisions might hurt stock prices in the short term. That doesn't mean they've done a bad job, necessarily.

Dooood!!! MBA, bro!

Every MBA that I know, and I mean every one of them, is a complete dumbass.
 
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look everyone, it's drunk John!
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49xjohn wrote:
look everyone, it's drunk John!

Hi, Drunk John.
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49xjohn wrote:
jarredscott78 wrote:
djgutierrez77 wrote:



There could be some of that, but there's also the fact that this is measured in terms of short-term shareholder return--that is, a turnaround CEO who comes in, makes some long-term strategic shifts, invests in new business lines, and writes off some empty goodwill from previous bad merger decisions might hurt stock prices in the short term. That doesn't mean they've done a bad job, necessarily.

Dooood!!! MBA, bro!

Every MBA that I know, and I mean every one of them, is a complete dumbass.


I know you believe I'm a moron (at least while you're hammered and posting during your typical drunk-posting window which happens to be right now) but do you also think Dave and Chad are complete dumbasses?
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djgutierrez77 wrote:
[...]
If I was on a board and hiring a CEO I'd want to be pushing a bonus-heavy package that rewards performance to key goals...you know, the kind of thing EVERY OTHER EMPLOYEE OF THE COMPANY has.

Not quite on topic, but IMO there's a serious meta-problem here.

Some jobs can be measured easily, and performance-based pay works well.

Many can't be effectively measured though.

This introduces a hard problem: if the people establishing the measurement system don't understand the process/method/thing they are measuring, they will get what they measure for, but not what they want.

A simple example is "pump and dump" option-centric CEO's. They are doing what they're told by the measurement system. But in the process they are effectively (but legally) destroying capital and stealing from income-biased shareholders.

Examples of bad outcomes don't solve hard problems of course. But simplistic highly-aggregated measurement-based rewards don't either.

An example of what happens very easily is this tedious combination:

* An organization is "internally optimized" by specialized units which together create and move product
* Everyone is measured on revenue and/or profit for their unit
* The principles of specialization that drove the organization means different units are in competition with each other, so ex-colleagues have to fight each other for "measurement recognition"
* Management says "we're all in the same organization therefore there's no internal competition", and deems discussion of the real problems "non-PC"
* .... the rest of this doesn't condense down to "profit"

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Dave G
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49xjohn wrote:
jarredscott78 wrote:
djgutierrez77 wrote:



There could be some of that, but there's also the fact that this is measured in terms of short-term shareholder return--that is, a turnaround CEO who comes in, makes some long-term strategic shifts, invests in new business lines, and writes off some empty goodwill from previous bad merger decisions might hurt stock prices in the short term. That doesn't mean they've done a bad job, necessarily.

Dooood!!! MBA, bro!

Every MBA that I know, and I mean every one of them, is a complete dumbass.


Every divorced sad-sack unemployed architect I know is a pathetic waste of air, but you don't see me telling everyone.

Oh wait.
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jarredscott78 wrote:
49xjohn wrote:
Every MBA that I know, and I mean every one of them, is a complete dumbass.


I know you believe I'm a moron (at least while you're hammered and posting during your typical drunk-posting window which happens to be right now) but do you also think Dave and Chad are complete dumbasses?

I don't know you Jarred. I don't know Dave or Chad, either. Do you guys have MBA's?

Here is what I do know: whenever I post something on this forum, you chime in and claim I am drunk. That, Jarred, a person I do not know, is kind of rude don't you think?

--

If I were the CEO, I think somewhere in the neighborhood of 10 times the average pay should be enough. More than that is obscene and begins to show off the flaws of capitalism.
 
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