Even when it comes the chief executives.
From today’s Wall Street Journal editorial page:
Watson Wyatt Worldwide has been tracking trends in executive pay for years. What it has found is that a CEO's pay tracks a company's three-year performance pretty closely.Thus, a company that offered its CEO a pay package in the middle of its peer group and had middling performance over the next three years ended up putting an average amount of money in its CEO's pocket. Companies that outperformed over those three years ended up with richer CEOs than comparable companies that underperformed, regardless of whether the pay package at the outset was low, medium or high relative to its peers.
Some companies do overpay. And Watson Wyatt's Ira Kay acknowledges that the Lake Wobegon Syndrome is present in some board rooms: Few directors want an "average" CEO, so they pay above the average for their group. While overpaying may not be optimal for shareholders, even "overpaid" CEOs, according to Watson Wyatt's research, do better when their companies do better. Which we thought was the idea.
Unfortunately, the editorial page goes on to warn, you won’t see any of this in the upcoming disclosures under the new SEC rules for executive compensation. And so we should all get ready for the outrage of the business columnists, which will of course be backed by graphs, charts and human interest stories about folks who cannot retire because they invested their life savings in an underperforming company whose CEO smokes cigars wrapped in thousand dollar bills on the thighs of America’s Next Top Model.
CEOs and Their Millions [Wall Street Journal]
Posted by Anonymous, Mar 21, 2007 5:18PM
I don't think that the conclusion of this article is "you get what you pay for." It is saying "you get paid for the work you do." That is, the study shows that CEOs get paid according to performance. Well that's no surprise because this is the whole point of compensating employees with stock options instead of hard cash. If the stock goes up, they get paid. If the stock goes down, they don't get paid. The article explicitly uses the word "correlated." Compensation is CORRELATED with performance. Correlation does not imply causation. The article does not claim that CURRENT CEO compensation predicts FUTURE stock returns.
If you really believed that you get what you pay for then you would go around picking only stocks of companies which had the highest paid executives in their market cap / industry. This would not be a smart investment strategy.