Executive Pay Increases of 80% and 1.0% Return Suggest There’s No Link to Performance
What do investors—and employees—get while CEOs enjoy a cool 80% salary increase? Zilch; that’s what they get.
A Lancaster University report says that the salaries of CEOs of major British companies rose by 80%. But investors got very little in return for the out-of-touch executive pay. In fact, they got a near-zilch equivalent of one percent, at best. (Source: “Study reveals ‘disconnect’ between senior pay and performance,” IR Magazine, December 28, 2016.)
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It turns out that investors who suspected that CEOs were making too much money were right. The relationship between executive pay and the performance of their companies is, at best, “insignificant.” (Source: Ibid.)
In other words, CEOs are getting paid too much money.
The Lancaster University, Management School study set a different yardstick to evaluate how leadership influences a company’s performance. The study focused on British companies, but it still offers insights for the rest of the world. In Britain, as elsewhere, there have been increasing questions about the nature of high executive pay. (Source: Ibid.)
There is one thing the study makes clear: there is a need to reform the rules of executive pay. There’s fair, and there’s excess. The latter prevails now, and it has become a major factor contributing to the growing gap between rich and poor.
The example from Britain offers valuable insight. The findings likely also apply to the rest of Europe, and to the United States and Canada. After all, if anything, globalization has created a similar corporate culture in most countries.
The study from Lancaster University shows that heads of the major British industries have seen their salaries increase by 80% in the last decade. Yet, the performance of the businesses under their direct command, based on return on invested capital, rose just one percent.
The study suggests there is no relationship between executive pay and return on investment. The study considered the 350 largest companies listed on the London Stock Exchange.
To be precise, the investigation reveals that the remuneration of CEOs has grown by 82% over the past 11 years, while in the same time frame, the profits of the companies in question on capital investments rose by less than one percent. The latter, according to the editors of the study, is a better indicator of the performance of a company than earnings per share (EPS). It’s an even better measurement than revenues. The latter’s value is less sophisticated and more short-term. (Source: Ibid.),
What is certain is that Britain has the most generous executive pay in Europe. In general, an average FTSE 100 CEO earned—or rather took home—almost US$8.0 million last year. (Source: “Crackdown on ‘Rocketing’ Executive Pay Urged by U.K. Tory,” Bloomberg, August 31, 2016.)
Last summer, the government of Theresa May pledged to reduce pay “excesses” for “big bosses.”
