An interesting piece recently put together by Ric Marshall & Linda-Eling Lee from MSCI Inc. answers this very important question for shareholders. The duo studied over 400 large U.S. corporations over a ten-year period, between 2006 and 2015, and concluded that higher pay does NOT mean higher returns for shareholders. On the contrary, CEOs not taking home as much in salary, bonuses, and options have achieved much stronger results. What makes this study even more powerful is that adjustments were made for the size of companies as well as the sectors that they are classified in.
So, why did the highest-paid CEOs post worse returns than their lowest-paid counterparts over a decade? Due in large part to an emphasis on short-term performance and annual reporting. MSCI concludes that one of the most notable ways to fix this misalignment has been to consider long-term performance and cumulative pay together over full management tenure. Hmm…
For more information on the methodology and results, click here to view the full report from MSCI.