| Finally, An Exec Comp Study For Investors |
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We've all seen our share of exec comp analysis and critiques. Investors can safely ignore almost all of them, since they largely conclude that CEOs earn too much money, which is bad, right?
A new study, though, covers the subjects that matter to PMs. Nowhere does it even state the average size of a CEO pay package. Instead, it explores the relationship between exec comp and company performance, and uses sophisticated corporate finance and exec comp design principles to explain the disconnect between pay and performance.
- At most companies, exec comp is not correlated with company results, which most PMs already know or at least suspect
- Total shareholder return makes no sense as a factor in determining exec comp, although 52% of companies use it
- Companies modify exec comp structure too frequently, with 60% changing key parameters or company peer groups in a year
- Almost all companies think about exec comp only in the short-term, with 90% using three years or fewer as the performance period
- Most importantly, too few companies (only 25%) use any return on capital, return on investment, or similar economic value metrics.
Worth a read.
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