High CEO Pay Hurts Shareholders

The WSJ has an article today based on two new studies about the relationship between CEO pay and shareholder returns. The first study, conducted by Prof. Lucian Bebchuk (Harvard Law School) - who has done some of the best work in this area - analyzed "more than 2,000 companies to see what share of the total compensation earned by the top five executives went to the CEO. The researchers call this number—which averages about 35%—the "CEO pay slice." It turns out that the bigger the CEO's slice of the pie, the lower the company's future profitability and market valuation. "These CEOs," says Prof. Bebchuk, "seem to be trying to grab more than they should.""
The second study, by Prof. Raghavendra Rau (Purdue University), analyzed "CEO pay and stock returns for roughly 1,500 companies per year from 1994 through 2006. They found that the 10% of firms with the highest-paid CEOs produce stock returns that lag their industry peers by more than 12 percentage points, cumulatively, over the next five years. Companies at the top of the pay pile, Prof. Rau concluded, award their CEOs an annual average of $23 million—but leave their shareholders poorer (relative to other companies in the same industry) by an average of $2.4 billion per year. Each dollar that goes into the CEO's pocket takes $100 out of shareholders' pockets.Studies like these will give further ammunition to legislators in the UK and Ireland in their attempts to hit CEOs hard. I look forward to reading the full papers as I work on completing my own paper for submission shortly.