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April 09, 2001
High CEO Pay Does Not Translate to Good Stock Performance
A new report indicates that top compensation packages may even foreshadow poor short-term stock
performance.
SocialFunds.com --
According to Business Week and the Bureau of Labor Statistics, in 1989 average CEO compensation was
$1.2 million, which was 45 times the blue-collar wage. In just ten years, that average rose to
$12.4 million, which was 475 times the blue-collar wage. The justification for huge pay packages,
corporate boards often say, is that big bucks are needed to snare the star executive that can lead
the firm to outperforming its peers.
 United for a Fair Economy, a Boston-based
non-profit working to reduce the inequities of wealth distribution in the U.S., has taken a closer
look at the stock performance of companies led by top-paid CEOs. They found that shareholders may
not be getting their money's worth. In their recently published report entitled "The Bigger They Come, The Harder They
Fall," they concluded that a huge compensation package was no guarantee for rising stock
prices.
"CEOs justify their pay packages by saying they generate tremendous wealth for
shareholders. But it's a myth that CEOs are paid for excellence. Typically, their companies don't
deliver excellence," says Scott Klinger, report author and co-director for the Responsible Wealth
project at United for a Fair Economy. "Companies with more limited wage gaps are actually better
bets for shareholders," he added.
Klinger examined stock price performance of companies
headed by the top ten highest paid CEOs for each of the seven years between 1993 and 1999. The
stock performance of each company was compared to both the S&P 500 and the company's peer group
over one-year and three-year time periods. In six out of the seven one-year time periods following
a CEO's appearance on the top ten list, at least half the companies under-performed the S&P 500.
In 40 percent of the cases, the companies trailed the S&P 500 by more than 15 percentage points.
The stock performance of the companies with the number one highest paid CEO fared even
worse. If someone had invested $10,000 in the company with the top compensated CEO on December 31,
1993, held it for one year, then sold it to buy stock in the next year's pay leader and so on, by
the end of 1999, the $10,000 investment would have eroded to $3,584. A $10,000 investment in the
S&P 500 over the same period would have grown to $32,300.
Company performance was even
more dismal when compared to industry peers. In each of the five three-year periods examined,
between 50 and 70 percent of the companies trailed their competitors.
"When Business Week
releases their list of the ten companies with the highest paid CEOs for 2000, that would be a good
list of stocks to sell short," commented Klinger.
But stock owners are not the only
stakeholder concerned about rising executive pay. The American Federation of Labor-Congress of
Industrial Organizations (AFL-CIO) recently introduced a revised Internet site called Executive PayWatch that enables
shareholders to e-mail corporate boards about their concerns regarding executive pay.
The
site specifically cited three companies, Bank of America (ticker: BAC), life
insurance and loan company Conseco
(CNC), and telecommunications provider Sprint (FON) as firms having
exhibited especially contemptible behavior regarding large compensation packages. For example,
Bank of America CEO Hugh McColl made more than $95 million in cash and stock options over the past
five years. During that same period, Bank of America's stock return under-performed the S&P Index
by -34 percent.
The momentum to stem rising executive pay is gaining. The number of
executive pay-related shareholder resolutions filed by social investors continues to increase;
Responsible Wealth itself has filed resolutions at seven companies this year. Reports such as "The Bigger They Come, The
Harder They Fall" may help institutional investors see the merits of these resolutions and
begin fighting against rubber stamp increases of CEO compensation.
©
SRI World Group, Inc. All Rights Reserved.
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