Whatever Hollywood's Wall Street characters may say, most people would agree that greed is not good. And new research reminds investors just how bad the pursuit of excessive wealth by CEOs can really be.
In a study recently published online by the Journal of Management, a trio of researchers examined the link between shareholder returns and certain aspects of CEO pay they believe are signs of executive greed. While the researchers are careful to say high pay doesn't necessarily mean CEOs are greedy, they hypothesized that several features of executive pay packages, when combined, could serve as a proxy for executive greed — and would be linked to lackluster shareholder returns.
Their guess was correct: A statistical examination of 335 companies showed that when CEOs fared better on three individual measures of their compensation, their shareholders fared worse.
Katalin Takacs-Haynes, an assistant professor at the University of Delaware who was one of the study's authors, says the idea for the study came out of the tension that exists between academics who study executive compensation and the rest of the public.
"In my field, we don't actually acknowledge the existence of greed as a construct," Takacs-Haynes says. "We say that CEO compensation is what it is because of various market forces, and [companies] pay because they have to remain competitive."
This research with her co-authors, she says, attempted to define what greed looks like in the executive suite through qualitative interviews, surveys and a statistical analysis, as well as to show that CEOs are not simply the lucky beneficiaries of all that largesse. "We're arguing that CEOs actively pursue their pay packages — they're not just passively receiving them."
The researchers first looked at the relative size of CEOs' perquisite package, which includes everything from the cost of executives' security detail to their country club memberships and premium health benefits. "These are things that really aren't necessary to do your job that well," she says. "Is it really necessary to have the use of a corporate jet for family members?"
The next factor they examined was the difference between the cash compensation of a CEO and his or her No. 2 most highly paid executive. "We feel very strongly that any kind of achievement or performance is the result of teamwork," Takacs-Haynes says. "If there is a huge gap between the CEO and the second most highly paid person, we can really see that the CEO is getting honored with this high package and is not really sharing well with even his immediate subordinates."
Finally, knowing that certain factors such as a company's size, its risk level or its international diversification drive up executives' pay, the researchers performed an analysis that looked for CEOs who were overpaid compared to a benchmark of their peers.
Despite the evidence of greed the researchers say they found, the study did have some good news for investors. Even at companies that paid out exorbitant perks or where executives were overpaid compared to their peers, the effect on shareholder return was lessened when the board was composed of more outside directors with large holdings of stock, when CEOs held the job longer, or when the company's industry was known to give CEOs less discretionary power over decision-making.
"A lot of times, when you have a board that's less powerful than the CEO, they can't curb the CEO's desire and wishes," Takacs-Haynes says. "But these are three very specific things that [investors and the board] can look at to try and rein in the CEO or rein in the compensation committee."