Debunking Three Common Myths About CEO Pay

tim cookTim Cook, the $378 million man.

Photo: Associated Press

Firms are commonly criticised for their CEO pay packages. It’s an easy line of criticism, the figures can be eye poppingly large, especially compared with average salaries.  A recent paper by the University of Chicago’s Steven Kaplan takes a look at the data, examining three common claims:

  1. That CEOs are being overpaid at an accelerating rate
  2. CEO pay is unrelated to performance
  3. Boards of public corporations do not hold CEOs accountable

While its certainly easy to pick out individual examples where all three of these accusations have happened, Kaplan found that they’re largely untrue. 

First, Kaplan found that average estimated CEO pay, adjusted for inflation, has actually declined since 2000. It’s in step with that of lawyers, but CEOs have been out-earned by venture capitalists, private equity executives, and hedge fund managers.

Second, the CEOs who were paid the most had delivered 60 per cent greater stock market returns, versus the lowest who underperformed by 20 per cent. 

Tim Cook’s total compensation totaled $378 million last year, but he oversaw a company which has become the most valuable in the world by market capitalisation.

Finally, boards fire CEOs at a much greater rate than they used to, and executive tenures are shorter. When boards have larger percentages of equity and independence, bad performance is even more likely to be punished. 

Consider Carol Bartz, who paid the price for the decline in Yahoo’s stock. 

The fact that more independent boards hold CEOs more accountable could be the focus of efforts towards making the outliers that provoke outrage. 

Read the full paper here.

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