How Sudden CEO Deaths Help Us Understand Executive Compensation

It’s easy to complain that corporate executives are overpaid. It’s harder to make a rigorous case for the idea: There’s no perfect metric to show how much executives are worth to a company, thus no great way to compare an exec’s compensation to the value she delivers. Do you know what would help settle the matter? If a bunch of CEOs would just drop dead.

At least we can examine the ones who already have. By looking at market movement and compensation for about 150 public company executives who died suddenly, two business professors have concluded the following: For every dollar in extra value that the average dead executive delivered to her company, she was paid 71¢.

About one-third of the executives were overpaid relative to their contributions to shareholder value, and one-third were underpaid, says Bang Dang Nguyen, a finance professor at the University of Cambridge Judge Business School and one of the study’s authors.

Nguyen and co-author Kasper Meisner Nielsen, who teaches finance at Hong Kong University of Science and Technology, scoured newspaper articles and regulatory filings to amass a sample of 81 CEOs and 68 other high-ranking executives who died unexpectedly from 1991 to 2008. Then they examined each company’s stock performance in the days before and after the event.

The authors compared those stock moves with the salary the deceased executive received, and the amount their replacement was expected to make. (It’s a bit more complicated than that. Nguyen says it took a year and a half to devise a methodology for separating the marginal value of a dead executive from the value of her replacement. For the finer points, look for the paper in an upcoming issue of Management Science.)

So is that 71¢ per dollar of value delivered too much? Nguyen doesn’t take a position. The paper’s purpose, he says, is to offer those engaged in the executive compensation debate a methodologically sound measure of executive value. Seventy-one percent sounds high, “but it’s not like he’s taking home more than he produced for the company,” says Nguyen.

That doesn’t mean you can’t use Nguyen’s research to denounce fat-cat CEOs. If you can’t make your case with rigor, make it with rigor mortis.

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