May 17, 2017
“Why It’s Right to Be Mad About Executive Pay”
– Broc Romanek
Here’s an excerpt from this European article entitled “Why It’s Right to Be Mad About Executive Pay”:
The critics are right and the defenders of CEO pay are wrong, according to a study for Handelsblatt Global Magazine by Zurich-based economist Gerhard Fehr. There is, on average, no discernible relationship between executive pay and company performance – suggesting that executives generally reward themselves regardless of whether they succeed or fail. Digging into the data for 70 leading companies in Germany, Switzerland and Austria – and comparing board members’ compensation with shareholder returns relative to other companies – Fehr found no pattern at all. “The idea that executive pay is generally based on performance is post-factual,” he says. Fehr is the founder and CEO of Fehr Advice, a consultancy and research group based on his work in behavioral economics.
If the idea were true that executives’ lavish pay checks were a reward for performance, then the data should show higher pay at companies producing higher shareholder returns – and vice versa. But in reality, Fehr and his researchers found no such connection, no matter how they sliced and diced the data. Pay goes up regardless of how companies perform.
Fehr’s study does not mean that there aren’t individual companies that reward their management for good performance, or cut pay when they do worse. What it does show, clearly, is that there is no such trend across all companies. For every company that rewards its executives for good performance, there is another where paychecks go up when times are bad. Many show little variation at all, signaling that these executives have managed to insulate themselves from the effects of their actions.
Unlike many company bonus systems, Fehr measures executives’ performance by looking at shareholder returns in relation to a company’s peers – what he calls a market-adjusted performance index. Executives shouldn’t be rewarded, he says, for share prices moving up or down with the general market.