The CSR Newsletters are a freely-available resource generated as a dynamic complement to the textbook, Strategic Corporate Social Responsibility: Sustainable Value Creation.

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Friday, October 3, 2014

Strategic CSR - CEO pay

The article in the url below provides evidence that challenges the idea that CEO compensation is tied to the performance of the firm:
 
"An analysis of compensation data publicly released by Equilar shows little correlation between CEO pay and company performance. Equilar ranked the salaries of 200 highly paid CEOs. When compared to metrics such as revenue, profitability, and stock return, the scattering of data looks pretty random, as though performance doesn't matter. The comparison makes it look as if there is zero relationship between pay and performance."
 
The graphic featured in the article demonstrates the absence of any correlation between pay and performance:
 
"Check the comparison of the ranking of the 200 CEOs Equilar looked at to their company's stock returns, as seen on the chart below. The trend line—the average of how much a CEO's ranking is affected by stock performance—shows that a CEO's income ranking is only 1 percent based on the company's stock return. That means that 99 percent of the ranking has nothing to do with performance at all. (The size and profitability of companies didn't affect the random patterns.)"
 
Note, essentially, the random distribution of data points:
 
 
This argument begs a bigger question – to what extent do CEOs matter? Most of the research that I have seen is that they make a single digit percentage difference to the firm (at best). Not inconsequential, to be sure, but far from the superheroes they (and society as a whole) make themselves out to be.
 
I hope the next myth that gets challenged is that there is a market for CEOs (and, for that matter, Directors) and that Boards need to pay them as highly as they do because otherwise they will not be able to attract the talent they need to run the firm.
 
Have a good weekend
David
 
David Chandler & Bill Werther
 
Instructor Teaching and Student Study Site: http://www.sagepub.com/chandler3e/
Strategic CSR Simulation: http://www.strategiccsrsim.com/
The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/
 
 
The Pay-for-Performance Myth
By Eric Chemi and Ariana Giorgi
July 22, 2014
Bloomberg BusinessWeek