When CEOs Are Paid for Bad Performance Stanford Graduate School of Business

(The comparisons end in 2017 because 2018 data for top 0.1% wages are not yet available). The fall in the stock market in the early 2000s after the bubble burst led to a substantial paring back of CEO compensation. By 2007, however, when the stock market had mostly recovered, average CEO compensation reached $20.0 million, just $1.5 million below its 2000 level, using the options-realized measure. However, CEO compensation measured with options granted in 2007 remained down, at $14.0 million, substantially below the 2000 level. Finally, the study found that investors would do well to pay attention to which firms are paying their CEOs commensurate with skill. If, in fact, a company has hired a good CEO worth the money paid to him or her, then that firm represents a good investment opportunity.

Extreme CEO-worker pay gaps are a problem for our society and economy

It recovered to 221-to-1 by 2014 and, after dipping a bit over the next three years, ended back up at 221-to-1 in 2018. This level is far lower than its peak in 2000 but still far greater than the 1989 ratio of 45-to-1 or the 1965 ratio of 16-to-1. This assumption also likely makes our ratio a more conservative estimate of Programming language the true ratio than the ratios reported to the SEC. Third, our analysis captures the ratio of CEO compensation to compensation of U.S. domestic workers only, which makes the ratios comparable in a way that the SEC-required ratios are not (given that they may or may not include workers in other countries). Fourth, our series is able to extend back to 1965, allowing us to analyze trends in executive compensation over time. The consistent basis of the measurement of our ratios permits historical comparisons on a year-to-year basis.

• Furthermore, the variance inflation factors were less than the benchmark of 5.
• “The puzzle is that profits have gone up but pay has gone down,” Kaplan says.
• This explains why some of our data—even for years relatively far in the past—changes with each new iteration of this report.
• We reported that compensation using options realized grew 17.5% over 2016–2017, far more than the corrected data show—a rise of 5.2%.

CEOs make 399 times as much as typical workers: CEO-to-worker compensation ratio, 1965–2021

Indeed, one very interesting result of the study is that incentive pay matters enormously in cases where there is CEO turnover in poor performing companies. If the new CEO is paid more than his or her predecessor and if the pay is largely incentive-based, the new boss is more likely to reverse prior poor performance. In each experimental condition, participants read three news articles about a well-known manufacturer of electronics. They were informed that the company is referred to as “Company X” in the articles due to legal concerns related to pending investigations.

Wall Street pay restrictions

When there is incongruence between CEO pay (high) and CEO performance (leader of the firm during a time of brand crisis), brands that have established strong equities are likely to drive greater consumer distrust, causing lower levels of purchase intent. While strong brand equity provides significant benefits for firms, this suggests a potential negative consequence of such strong equity. What is particularly striking about these results is that brand equity helps insulate a company against the negative effects of high CEO pay; however, it has a negative impact when a company experiences both high CEO pay and brand crisis. This shift in impact suggests that for strong equity brands, high CEO pay and brand crisis create a significant failure to live up to both prior performance that enabled the brand to achieve strong equity and current expectations of performance. To further validate our findings from experiments in Study 1 and Study 2, we employ an event study by considering investors’ reaction as an ex-ante indicator of the reaction of consumers.

Composition of CEO compensation

“Everybody’s complaining that something’s broken, but if you look at those trends, that complaint makes no sense.” Seru, Nanda, and Morse argue that such aggregate trends may mask the cross-sectional differences uncovered in their study. Moreover, they say, some of the patterns they identified in their paper may have been ameliorated after the Securities and Exchange Commission sent several companies letters in 2007, critiquing the disclosure practices of their executive pay contracts. ExecuComp had flaws in the measure of fair value measure of stock awarded in the data used in our last report (as detailed in Box A in Mishel and Scheider 2018) that required an adjustment to the data.

Efforts to curb CEO pay-inflating stock buybacks

Research by Jonathan L. Rogers and Sarah L. C. Zechman of the University of Colorado, Boulder, and Chicago Booth’s Douglas J. Skinner suggests that stock markets move in response to media reports of SEC disclosures as well as to initial public dissemination via the SEC website. Lawrence Mishel is a distinguished fellow and former president of the Economic Policy Institute. His articles have appeared in a variety of academic and nonacademic journals. His areas of research include labor economics, wage and income distribution, industrial relations, productivity growth, and the economics of education. He holds a Ph.D. in economics from the University of Wisconsin at Madison.

The “Fair Wage-Effort Theory” posits that pay disparity causes resentment among lower-level employees, leading them to take actions, such as shirking or quitting, that undermine enterprise effectiveness. Earlier this month, the bank reported record financial results for 2024, with net income rising to $59 billion, an increase of 18% from the almost $50 billion it generated the year prior. Over the past 12 months since late January 2024, the company’s stock price has climbed around 57% to about $265 per share. In addition to her work on the CEO pay series, she has worked on the State of Working America 2020 wages report and the domestic workers chartbook, among other EPI publications. She has a bachelor’s degree in economics from the University of Texas at Austin. Together, finance workers (including some who are executives) and nonfinance executives accounted for 58% of the expansion of income for the top 1% of households and 67% of the income growth of the top 0.1%.

Just last week, Senate Budget Committee Chair Sheldon Whitehouse (D-RI) and Representatives Barbara Lee (D-CA) and Alexandria Ocasio-Cortez (D-NY) introduced the Curtailing Executive Overcompensation (CEO) Act. This bill would apply an excise tax to publicly traded and private companies that have above a CEO-to-median-worker pay disparity of more than 50 to 1. Surprisingly, “there has been little empirical research into it (brand trust)” (Delgado-Ballester & Munuera-Aleman, 2005, p. 187) and “what builds trust remains largely unanswered” (Kang & Hustvedt, 2014, p. 253). However, some scholars contend that CEO pay is insufficiently tied to firm performance and, subsequently, is unrelated to CEO effort or capability (Conyon, 2014; Walsh, 2008). Further, recent research has found that there are conditions under which investors care more (less) about CEO pay.

Trends in CEO compensation growth

All else being equal, tying CEO compensation to growth in shareholders’ incomes should better align their sometimes-conflicting Chief Executive Officer of an AI startup job incentives (see Bebchuk and Fried 2004 for the myriad ways the interests of shareholders and CEOs can be in conflict). However, a number of questions remain about the most efficient way to structure CEO pay. The overall value of superstar firms is yet another reason a first-rate CEO can be so very, very valuable. Building such an operation helps those firms raise wages for just about everyone.