CEO pay and performance

It’s not news that chief executive officers are generally highly paid. How highly paid? Well, according to the Economic Policy Institute, “In 2020, a CEO at one of the top 350 firms in the U.S. was paid $24.2 million on average” — that’s up a whopping 18.9% over the previous year’s level, due in large part to stock awards and stock options.

For perspective, it’s helpful to compare CEOs’ pay to that of their workers. Per the EPI, the ratio of CEOto-typical-worker compensation was 61-to-1 in 1989, surged to 307-to-1 in 2019, and then rose another 14% to 351-to-1 in 2020. Between 1978 and 2020, CEO compensation (including stock awards and options) surged 1,322%, while typical workers saw their pay grow by only 18%.

Those earning outsized pay, and those granting it, will argue that you have to pay for great performance. But there are studies showing that many companies are paying for underperformance. The research outfit MSCI, for example, studied CEO pay and company performance at 429 companies in the MSCI USA Index over the 10 years between 2006 and 2015; it found that “the bottom fifth of companies by equity incentive award outperformed the top fifth by nearly 39% on average on a 10-year cumulative basis.”

Why are so many CEOs collecting so much in cash and stock while not delivering particularly strong company performance? Well, it’s the board of directors that sets CEO pay, and CEOs are often in the room — and even on the compensation committee! — when they do so. CEOs can also influence who is nominated to be a board member, and as Warren Buffett has quipped, “When seeking directors, CEOs don’t look for pit bulls. It’s the cocker spaniel that gets taken home.”

Shareholders do have a say: They can express any dissatisfaction by voting against proposed CEO compensation packages. (Such votes are currently nonbinding in the U.S., though that may change.)