It makes sense to assume the highest-paid CEOs in America also are the best-performing CEOs.
But the numbers tell a different story.
Last year, corporate governance research firm MCSI did a study of 800 CEOs at 429 large and mid-size U.S. companies over a 10-year span, from 2006 through 2015.
This study found the opposite is true – the best-paid CEOs on average deliver the worst results for shareholders.
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Measured by total shareholder returns, the highest-paid CEOs in the MCSI study (those with total compensation above the median) underperformed the lowest-paid CEOs (those with total compensation below the median) by a stunning 39%.
Note that CEOs don’t just get compensated in salary and benefits like the rest of us. They also get huge bonuses, stock options, stock awards, perks, and other incentives.
While investors need to keep most of their focus on the company itself, it’s apparent that high CEO pay can be a red flag.
Another useful tool is the ratio between the CEO’s compensation and that of the company’s median worker. And starting next year, investors will be getting a lot more information on that…
A New Window into Excessive CEO pay
The disclosure of the ratio between CEO pay and worker pay is required under 2010’s Dodd-Frank Act, but was delayed for years as companies complained about the difficulties of compliance.
But in 2015, the U.S. Securities and Exchange Commission voted to put the rule into effect as of the first quarter of 2018 – less than a year away.
What we do know is that the gap between CEO pay and that of the average worker has grown to an embarrassing size – the AFL-CIO reported that the average American CEO made 335 times more money in 2015 than average production and non-supervisory workers did.
By comparison, U.S CEO compensation was just 30 times that of the average worker in 1978.
In terms of dollars, the average CEO of a Standard & Poor’s 500 company made $12.4 million in 2015, while the average worker made $36,875.
Even assuming a 60-hour work week, that translates to the average CEO making $3,975 an hour. In just a little over nine hours, the average CEO earns more than the average worker does over an entire year.
But those averages greatly understate the discrepancies in the pay ratios of the highest-paid CEOs (hence the need for the Dodd-Frank disclosure rule).
The highest-paid CEO in 2015 (the latest year for which we have data) was Expedia Inc.’s (Nasdaq: EXPE) Dara Khosrowshahi. He made $94.6 million. That’s $1,819,231 per week, or $30,320 an hour (for a 60-hour week).
Khosrowshahi at least delivered 47% in total shareholder returns in 2015.
But no one else in the 25 highest-paid CEOs of that year came close to that performance.
Here’s a chart showing how much each of the highest-paid CEOs made in 2015, how well the company’s stock fared, and the total shareholder return.
Few of the Highest-Paid CEOs Earn Their Keep
Expedia Inc. (Nasdaq: EXPE)
CBS Corp. (NYSE: CBS)
|3.||Philippe P. Dauman
Viacom Inc. (Nasdaq: VIAB)
|4.||Mark V. Hurd
Oracle Corp. (Nasdaq: ORCL)
|5.||Safra A. Catz
Oracle Corp. (Nasdaq: ORCL)
|6.||Frank J. Bisignano
First Data Corp. (NYSE: FDC)
|7.||Leonard S. Schleifer
Regeneron Pharmaceuticals Inc. (Nasdaq: REGN)
|8.||Robert A. Iger
Walt Disney Co. (NYSE: DIS)
General Growth Properties Inc. (NYSE: GGP)
|10.||Howard M. Lorber
Vector Group Ltd. (NTSE: VGR)
|11.||Marissa A. Mayer
Yahoo! Inc. (Nasdaq: YHOO)
IMS Health Holdings Inc. (NYSE: IMS)
|13.||Marc Benioffsalesforce.com Inc. (NYSE: CRM)||$33.4 million||32%||21%|
|14.||David M. Cote
Honeywell International Inc. (NYSE: HON)
|15.||David M. Zaslav
Discovery Communications Inc. (Nasdaq: DISCA)
|16.||Jeffrey L. Bewkes
Time Warner Inc. (NYSE: TWX)
|17.||Gregory C. Case
Aon Plc. (NYSE: AON)
|18.||James E. Meyer
Sirius XM Holdings Inc. (Nasdaq: SIRI)
|19.||Mary T. Barra
General Motors Co. (NYSE: GM)
|20.||Jeffrey M. Leiden
Vertex Pharmaceuticals Inc. (Nasdaq: VRTX)
|21.||Brian L. Roberts
Comcast Corp. (Nasdaq: CMCSA)
|22.||Gregory B. Maffei
Liberty Media (Nasdaq: LMCA) & Liberty Interactive (Nasdaq: QVCA)
|23.||Leslie H. Wexner
L Brands Inc. (NYSE: LB)
|24.||Jeffrey R. Immelt
General Electric Co. (NYSE: GE)
|25.||Laurence D. Fink
BlackRock Inc. (NYSE: BLK)
*Total Shareholder Return
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