The Strategist

MSCI: highly paid CEOs are bad supervisors

07/27/2016 - 15:50

The most well-paid CEOs often head least efficient companies, shows new study of MSCI.

Evan Jackson
Evan Jackson
The study examined almost 800 payouts of General Directors of 429 largest US companies during the period from 2005 to 2015. The researchers also took into account income of these companies’ shareholders over the same period.

The study found that during 10 years, $ 100, invested in shares of 20% of companies with the highest-paid CEOs, turned into $ 265. A similar amount, yet invested in less generous companies, would have grown to $ 367 over the same period.

Large companies see a fundamental principle of top managers’ motivation as a compensation in stock options for purchase of large blocks of shares. The management blindly believes that it would lead to better results and increase return to shareholders. The results suggest that this principle may turn out to be wrong.

According to MSCI’s Senior Analyst Ric Marshall, effectiveness of those companies which CEOs reward is low significantly exceeds efficiency of companies with high rewards.

MSCI has also analyzed benefits and performance indicators of companies across many sectors, yet results were the same. Almost 50% of directors, who received the highest payouts, are leading the less efficient companies.

The experts explain that companies often revise remuneration once a year, and then publish reports based on this. This scheme prevents focusing on results in the longer term.

MSCI’s study has recommendations to SEC. The Commission is offered to oblige companies to publish data on its total payments to top management     over the course of a longer period.

At that, critics of the existing system of top management’s remuneration have long urged to review the existing system, and associate it with final performance indicators of companies.

Previously in June, The Wall Street Journal has already drawn attention to weak dependence of top managers’ annual salary on the effectiveness of their companies. Thus, profitability of investments in S&P 500 companies fell from 18% in 2014 to 1.3% in 2015, yet salaries of their executives decreased by only 4.6% during this period.

According to ISS Corporate Solutions, over the past five years yield of securities to shareholders in most of the companies S&P 500 grew higher than remuneration of their first persons. The discrepancy between earnings of CEOs and the companies’ annual efficiency is obliged to one simple fact. Some companies in difficult times advocate their top-managers’ bonuses by strategic and operational achievements. Others tie the payments to the long-term objectives, which cannot be influenced by poor performance during one year.

Dara Khosrowshahi of online booking company Expedia travel is the highest paid CEO. Remuneration of the 47-year-old top manager amounted to $ 94.6 million last year, including $ 90.8 million in the form of stock options, to be paid over the next four years. Khosrowshahi’s earnings increased dramatically -  compared to $ 9.6 million in 2014, they are 9 times higher than remuneration of Timothy Cook from Apple. Sarah Gavin, a spokesman for Expedia, said that such a high award is intended to keep the top manager at this position in the long term. Khosrowshahi is followed by two top managers of media empire Sumner Redstone - Les Moonves of SBS ($ 56.8 million) and Viacom’s CEO Philippe Dauman ($ 54.2 million). Indicators of profitability for CBS and Viacom’s shareholders are below the median level for S&P 500 media companies (-3.8% in 2014). It was -13.8% for SBS, and -42% for Viacom. 


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