The Pay-for-Performance Myth
With all the public chatter about exorbitant executive compensation and income inequality, it’s useful to look at the relationship between chief executive officer pay and corporate performance. Typically, when the subject of their big pay packages arises, CEOs—usually through their spokespeople—say they are paid for performance. Does data back that up?
An analysis of compensation data publicly released by Equilar shows little correlation between CEO pay and company performance. Equilar ranked the salaries of 200 highly paid CEOs. When compared to metrics such as revenue, profitability, and stock return, the scattering of data looks pretty random, as though performance doesn’t matter. The comparison makes it look as if there is zero relationship between pay and performance.
Check the comparison of the ranking of the 200 CEOs Equilar looked at to their company’s stock returns, as seen on the chart below. The trend line—the average of how much a CEO’s ranking is affected by stock performance—shows that a CEO’s income ranking is only 1 percent based on the company’s stock return. That means that 99 percent of the ranking has nothing to do with performance at all. (The size and profitability of companies didn’t affect the random patterns.)
If “pay for performance” was really a factor in compensating this group of CEOs, we’d see compensation and stock performance moving in tandem. The points on the chart would be arranged in a straight, diagonal line. They certainly wouldn’t look like this: