A recent study by Michael J. Cooper of the University of Utah, Huseyin Gulen of Purdue University and P. Raghavendra Rau of the University of Cambridge have determined that higher-paid CEOs do a worse job than their lower-paid counterparts. According to the study cited by USA Today, CEO pay has increased 725 percent since 1978, while regular worker pay has gone up only 10 percent. As it turns out, it is not just the common worker who thinks CEOs get paid too much, the data agrees too.
A high-paid CEO is looked at like any big name superstar athlete. Corporations bring these skilled individuals to steer the ship towards a successful financial future. Cooper, Gulen and Rau would tend to disagree. They have proven that in the long run, the majority of highly paid CEOs end up losing the company money rather than making it. In fact, those in the top 10 percent of the pay scale end up losing their company up to 8 percent in revenue. They also determined that the longer the CEO stays in the position, the bigger the negatives become.
The researchers even believe they have come to understand the source of the phenomenon. They believe it all comes down to overconfidence. They argue that acquiring so much personal wealth would lead anyone to believe that they must be doing well at their job. The overconfidence therefore serves as the catalyst for poor decision-making that may lead to long term consequences they can not immediately envision.
The study explained, as reported by USA Today, “Higher-paid managers exhibit behavior consistent with overconfidence. Further, these overconfident CEOs invest more, engage in more mergers, and experience greater negative returns to the announcements of these mergers relative to other CEOs. Most importantly, we find that firms with highly-paid CEOs earn significantly lower returns when the CEO is also overconfident.”
One example the study cited was the British Petroleum oil spill, which came about by then-CEO Tony Hayward taking several cost-cutting short cuts in the rigs’ construction. The study also cited GM who has suffered for the last decade from CEOs who have declined to recall vehicles in favor of saving money. GM is in the midst of settling one such recall lawsuit right now.
Read also: GM Initiates Recall in China
Cooper, Gulen and Rau explained that CEOs often create a “yes-man” culture, even if accidentally, and they have no one to tell them when they are making a bad move. These CEOs see themselves as slaves to the shareholders who demand short-term rewards even if it creates trouble for the company down the line.
At the moment, there is very little that can be done to reign in CEO salaries. When speaking with Forbes, Cooper explained a “clawback” policy that would tie a CEO’s earning power to the financial status of the company. Still, there are very few companies that would be willing to change their current models.
Photo: photospin stock/file
Comment Template