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How Much Is a CEO Worth?

Some critics say CEO pay is extravagantly high and not justified by shareholder value metrics. 

Yan Barcelo 13 December, 2022 | 1:03AM
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So just how much is enough for a CEO?

The projected “realized” average CEO pay at the top 350 firms in the U.S. in 2021 will be US$ 27.8 million in 2021, while the “granted” average was US$15.6 million, finds the most recent report by the Economic Policy Institute. (The difference between “realized” and “granted” is that the first measures all stock options and awards when they are cashed in, the second, when announced). For example, in its 2020 report, the EPI found that “realized” pay was US$24.2 million, “granted”, US$13.9 million.

The EPI observes that CEO pay “has skyrocketed 1,460% since 1978,” 399 times above a typical worker’s pay. In 1965, CEOs’ “realized” pay was 20 times a typical worker’s, rising to 30 times in 1980 and 59 times in 1990, then catapulting within a decade to 393 times in 2000. It backpedaled to 200 times in 2010, then raced to today’s ratio of 399. In the 43 years between 1978 to 2020, the typical worker’s pay rose by about 18%, the top CEOs’, by 1,460%, far exceeding “the growth in productivity, profits or stock market values in that period,” highlights the EPI.

In Canada, things are not as spectacular, but still dramatic. The 100 highest-paid CEOs “recorded their second-best year ever for compensation in 2020 despite the COVID-19 pandemic,” finds the Canadian Centre for Policy Alternatives. Average pay was $10.9 M, which is 191 times more than the average worker’s wage in Canada.

“At this rate, it will take the average worker the entire year to accrue what Canada’s highest-paid CEOs will rack up just before lunch (11:54 a.m.) on January 4—the first official working day of the year,” says the report’s author, CCPA Senior Economist David Macdonald.

The Problem with Linking CEO Pay to Stock Prices

CEO compensation typically comes in three packages: base salary, bonus and stock-related components, usually stock options and, increasingly, stock awards. With stock options, CEOs can only make gains; there are no losses even if the stock price falls.

Indeed, many companies “even made performance pay adjustments in 2020 to insulate CEOs from the pandemic’s impacts on their stock price, but when stocks are riding high, we don’t see the same adjustments,” observes Jackie Cook, Director of  Stewardship Product Strategy, Sustainalytics Stewardship Team. Awards aim at more closely aligning CEOs’ goals with those of shareholders, since their value can increase or decrease in value as the stock price changes. In such a scheme, a CEO can aim to boost the stock price, but also needs to be mindful not to pull it down.

However, it is far from clear that a company’s stock price truthfully reflects a CEO’s performance. “Share price can be influenced by all sorts of factors independent from CEO action, says Cook. And a focus on short-term stock price gains can undermine long-term value.” The logic here is, you can run up the share price and actually kill the company in the long run.

Nortel is Canada’s emblematic example of such destructive behavior. As this writer’s investigation of Nortel in the aftermath of its implosion revealed, just before the fall, executives were doing everything they could imagine to boost the share price or, as they called it, increase “shareholder value”.

Linking CEO Pay to Stock Price Doesn’t Necessarily Work

Reviewing the 25 largest American companies to go bankrupt in preceding years, a Financial Times article calculated that their CEOs had walked away collectively with US$ 3.3 billion in share sales and other rewards. Critics pointed out that never had so many people been paid so much to achieve so little.

An academic paper found that “measures of Chief Executive Officer (CEO) excess compensation are negatively related to future firm returns and operating performance. The effect is stronger for more overconfident CEOs at firms with weaker corporate governance.”

Another recent study “found little overlap between CEOs who are top performers and CEOs who are top earners. (…) The typical approach to CEO compensation based on averages significantly underpays stars and overpays average performers.”

Why it Matters? CEO Pay Is a Key Part of Good Governance

ESG (Environmental, social and governance) factors are slowly making their way into CEO compensation plans – especially the governance pillar.

“ESG performance metrics should track long-term sustainability goals; let’s remember that most of today’s CEOs won’t be around to be accountable for the climate situation in 2050,” Cook says. For the time being, she adds, “we see only a small proportion of bonuses being allocated to ESG metrics and very few long-term incentive plans contain any ESG targets.”

Ultimately, Cook agrees, questioning CEO compensation from the perspective of inequality, or from the perspective of stock performance, or even from an ESG perspective doesn’t answer a fundamental question: how much is a CEO worth?  Probably not as much as most CEOs are paid, she suggests.

And then there’s diversity, equity and inclusion to consider too.

“Only around 7 percent of S&P 500 CEOs are women, Cook points out. Assuming there was more competition for the top spots from a broader pool of talent, would we see such ‘rock star’ pay packages?

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About Author

Yan Barcelo  A veteran financial and economic journalist with more than 30 years of experience, Yan writes for many publications in Toronto and in Montreal, including CPA MagazineLes Affaires and Commerce.

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