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Pay for (bad) Performance

A new university study finds that a high CEO compensation actually correlates with worse financial performance for their company.

In plain words, not only do these high-priced CEOs cost more (in salary and other compensation), they also cost their companies in other ways, including lower stock price and lower profitability. In fact, CEOs with an average compensation of more than $20 million were associated with an average yearly loss of $1.4 billion for the firms they ran.

The main problem is that higher compensation is associated with CEO overconfidence in their own decision making, which leads to stupid decisions. In particular, overpaid CEOs are more likely to do risky takeovers and other questionable mergers and acquisitions, which typically hurt their company’s performance.

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One Comment

  1. Mike wrote:

    I’m glad they did the study and that you posted this. CEO pay in the US (as compared to the industrialized nations of Europe and Asia) is utterly out of control, and unjustifiable. This issue needs more public airing.

    Tuesday, June 24, 2014 at 7:17 am | Permalink

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