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Tuesday, February 7, 2017

Strategic CSR - CEO pay (I)

This week's Newsletters focus on the contentious issue of CEO pay. To start us off, the article in the url below doesn't pull its punches in terms of the composition of CEO pay (i.e., performance-related), a practice that continues in spite of all the evidence that it is ineffective (in theory and practice), both in terms of motivating the CEO and improving the firm's performance:
"Verizon's purchase of Yahoo! for $4.83 billion, while an interesting exercise in combining content, networks and mobile services, highlights the broken norms for paying executives of U.S. corporations. The short version is that issuing and repricing of stock options compensates executives for bull markets rather than their own performance."
The purchase of Yahoo! by Verizon last summer is presented as simply the latest example of the corrupt process that generates massive (and often undeserved) compensation:
"When the deal is complete, Yahoo Chief Executive Officer Marissa Mayer will walk away with more than $200 million for doing little more than keeping the seat warm for the past four years."
The research is pretty clear on this issue:
"Research has shown that external influences account for the majority of a given company's share price. A rule of thumb is that the company itself is only responsible for about a third of its price movement. The market gets credit for about 40 percent, while the performance of the company's industry drives another 30 percent."
That doesn't leave much variance for the CEO to claim credit for, even though they persist in doing so:
"There are of course exceptions. Apple's incredible share run-up on the iPod, iPhone and iPad is hard to match. But most companies' share price gains and losses largely reflect things beyond the control of the company or its executives. … The counterargument is that you want a steady hand on the tiller when a storm strikes. I don't disagree, but I am suggesting that paying that steady hand for achieving a market-based performance is foolishness plain and simple."
Of course, the author is not arguing that all CEOs are equally good (or bad), but that the measures used to track their 'performance' (usually stock price via options) are flawed:
"Share price isn't a very precise way of compensating for value delivered. Indeed, share price may be one of the worst ways to judge an executive's performance. It rewards executives for positive events beyond their control, and doesn't do an effective job of measuring the impact of management on a company's overall performance."
In contrast, there are more effective (although harder to measure) metrics that are known:
"If shareholders are compensating CEOs and the rest of the management team for how well they are managing the company, then there should be some metrics that are easy to agree upon on advance. All of them can be readily identified and tracked versus peers. Consider these five things on a relative basis to the business's competitors:
1. Changes in revenue and earnings
2. Return on invested capital
3. Development of long-term strategy
4. Execution of current strategy
5. Innovation and intellectual-property development."
The alternative, of course, is to continue doing what we have been doing for several decades which, as the article in the second url summarizes, has produced counter-productive outcomes:
"The best-paid CEOs tend to run some of the worst-performing companies and vice versa—even when pay and performance are measured over the course of many years."
To see what this looks like when graphed, see:
Take care
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The library of CSR Newsletters are archived at:
CEOs are Paid Fortunes Just to be Average
By Barry Ritholtz
July 25, 2016
Bloomberg Businessweek
Best-Paid CEOs Run Some of the Worst-Performing Companies
By Theo Francis
July 25, 2016
The Wall Street Journal
Late Edition – Final