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Ok, so I do believe that CEO's are usually overpaid with regard to their performance. That being said, I am not convinced by the methodology used in the study,

Ok, so I do believe that CEO's are usually overpaid with regard to their performance. That being said, I am not convinced by the methodology used in the study, specifically the period used for measuring the performance: 3 years. It sounds like a lot of time, but actually, I would expect a truly great CEO to undertake projects with a 5 years or more horizon. There's this great interview of Bezos discussing the point of focusing on quarterly results vs long term. So an alternative explanation for the findings could be: the highest paid CEOs invest in 5-10 years projects, so their results after 3 years are below average. Again, I repeat that even before reading the study, I intuitively agreed with their conclusion, but I'm not so sure about their argument to prove it

CWuestefeld 12y ago
Looking at the first 3 years seems almost doomed to failure. It seems to me that it's pretty likely that a new CEO is going to be taking a company in a direction at least slightly different. That means cutting out some projects may have been just about to pay off, while at the same time embarking on new ventures that won't bear fruit for some time. One might interpret these results to say, "the highest-paid CEOs are engaging in the most expensive change for their firms". It's only natural that significant change is both forgoing some income that would have been realized soon, and creating risks for what's in the short-to-medium term while they look to the horizon. This is all to be expected, and doesn't necessarily say anything about the amount of value they create in the long term.
- Spooky23 12y ago
  Stock prices are based on the market's view of the future. You don't evaluate a CEO like a middle manager. If he cuts some critical program for strategic reasoning, the market will either punish him or reward him based on the future outlook.
  - voronoff 12y ago
    Stock markets also consider risk, so when a new CEO pushes for a new direction, that's penalized initially even if it's the correct long term approach because more is unknown.
  - TheOtherHobbes 12y ago
    Stock prices are animal herd logic, not science. See e.g. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=670404 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=670404 If you believe that business should have long-term horizons and not simply be a machine for organising the maximum possible quarterly profit, stock markets in their current form are one of the least efficient ways to organise labor and capital. Inflated CEO pay is only one symptom of this.
    - CWuestefeld 12y ago
      Stock prices are animal herd logic, not science That's not how I understand your link. The study suggests to me that analyst recommendations are unreliable predictors of short-term gain. And it certainly does not show that changes in a company's overall market capitalization are based on a herd mentality. Note that it says that those rebalancing according to advisors achieved higher terminal wealth, but lower risk-adjusted return. Most importantly, they did do better in the end. But adjusted for risk, it's worse. This suggests to me that the analysts usually do pretty well, but when they flub it, it's a doozy.
- cpeterso 12y ago
  The study should also consider the company's performance before the CEO takes over. If a CEO is coming in to rescue a company that's in trouble, they might expect to be compensated for the additional risk they are taking on.
Spooky23 12y ago
Normally I would agree with you, but the average tenure of a Fortune 500 CEO is less than 4 years. If you raise the bar for period of performance, you're filtering out the bozos who go away quickly. The way I read it that if you're not a superstar, you're investing lots of time horse trading and kissing babies to get the big bucks. That time would probably be better spent doing work productive to the business.
njharman 12y ago
A couple issues. Poor CEO's probably don't last 5 years. I'd suspect a strong correlation to performance and CEO's "horizon". In that those CEO's focused on next years or next quarters numbers are likely to thave poor (longterm) performance. Superstars such as Bezos or Musk are probably anomalies and not useful in studying CEO performance in general.
- tjradcliffe 12y ago
  Bezos and Musk are also founders. The basic problem with CEOs is that they pose a huge agency issue: they are supposed to be appointed as agents of the owners who are themselves represented by the Board of Directors. However, no one has ever found a way to provide effective oversight to ensure that CEOs act in the interests of the owners rather than in their own interests. Attempts to tie CEO interests to owner interests by tying compensation to the company's performance have thus far failed, mostly because a) the fraction of compensation isn't sufficient to overcome the CEOs self-serving motivation or b) the specific tying system can be gamed to the CEO's advantage. Furthermore, there is an asymmetry in the degree of interest between the parties: CEOs have a very large interest in maximizing their own compensation, while shareholders see CEO compensation as one expense amongst many others, and as such are less interested in it. These issues have been known for a long time, and again: no one has come up with a viable answer. Anything anyone who is posting here thinks of has almost certainly been thought of before, tried, and seen to fail.
  - yuhong 12y ago
    I wonder if corporations that uses entirely non voting stock exist.
    - alexeisadeski3 12y ago
      Who would pick the directors?
  - georgemcbay 12y ago
    "Attempts to tie CEO interests to owner interests by tying compensation to the company's performance have thus far failed, mostly because a) the fraction of compensation isn't sufficient to overcome the CEOs self-serving motivation or b) the specific tying system can be gamed to the CEO's advantage." and/or c) extrinsic motivators aren't effective for non-mechanical work. http://www.ted.com/talks/dan_pink_on_motivation http://www.ted.com/talks/dan_pink_on_motivation

CWuestefeld 12y ago

Looking at the first 3 years seems almost doomed to failure. It seems to me that it's pretty likely that a new CEO is going to be taking a company in a direction at least slightly different. That means cutting out some projects may have been just about to pay off, while at the same time embarking on new ventures that won't bear fruit for some time. One might interpret these results to say, "the highest-paid CEOs are engaging in the most expensive change for their firms". It's only natural that significant change is both forgoing some income that would have been realized soon, and creating risks for what's in the short-to-medium term while they look to the horizon. This is all to be expected, and doesn't necessarily say anything about the amount of value they create in the long term.

Spooky23 12y ago
Stock prices are based on the market's view of the future. You don't evaluate a CEO like a middle manager. If he cuts some critical program for strategic reasoning, the market will either punish him or reward him based on the future outlook.
- voronoff 12y ago
  Stock markets also consider risk, so when a new CEO pushes for a new direction, that's penalized initially even if it's the correct long term approach because more is unknown.
- TheOtherHobbes 12y ago
  Stock prices are animal herd logic, not science. See e.g. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=670404 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=670404 If you believe that business should have long-term horizons and not simply be a machine for organising the maximum possible quarterly profit, stock markets in their current form are one of the least efficient ways to organise labor and capital. Inflated CEO pay is only one symptom of this.
  - CWuestefeld 12y ago
    Stock prices are animal herd logic, not science That's not how I understand your link. The study suggests to me that analyst recommendations are unreliable predictors of short-term gain. And it certainly does not show that changes in a company's overall market capitalization are based on a herd mentality. Note that it says that those rebalancing according to advisors achieved higher terminal wealth, but lower risk-adjusted return. Most importantly, they did do better in the end. But adjusted for risk, it's worse. This suggests to me that the analysts usually do pretty well, but when they flub it, it's a doozy.
cpeterso 12y ago
The study should also consider the company's performance before the CEO takes over. If a CEO is coming in to rescue a company that's in trouble, they might expect to be compensated for the additional risk they are taking on.

Spooky23 12y ago

Normally I would agree with you, but the average tenure of a Fortune 500 CEO is less than 4 years. If you raise the bar for period of performance, you're filtering out the bozos who go away quickly. The way I read it that if you're not a superstar, you're investing lots of time horse trading and kissing babies to get the big bucks. That time would probably be better spent doing work productive to the business.

njharman 12y ago

A couple issues. Poor CEO's probably don't last 5 years. I'd suspect a strong correlation to performance and CEO's "horizon". In that those CEO's focused on next years or next quarters numbers are likely to thave poor (longterm) performance. Superstars such as Bezos or Musk are probably anomalies and not useful in studying CEO performance in general.

tjradcliffe 12y ago
Bezos and Musk are also founders. The basic problem with CEOs is that they pose a huge agency issue: they are supposed to be appointed as agents of the owners who are themselves represented by the Board of Directors. However, no one has ever found a way to provide effective oversight to ensure that CEOs act in the interests of the owners rather than in their own interests. Attempts to tie CEO interests to owner interests by tying compensation to the company's performance have thus far failed, mostly because a) the fraction of compensation isn't sufficient to overcome the CEOs self-serving motivation or b) the specific tying system can be gamed to the CEO's advantage. Furthermore, there is an asymmetry in the degree of interest between the parties: CEOs have a very large interest in maximizing their own compensation, while shareholders see CEO compensation as one expense amongst many others, and as such are less interested in it. These issues have been known for a long time, and again: no one has come up with a viable answer. Anything anyone who is posting here thinks of has almost certainly been thought of before, tried, and seen to fail.
- yuhong 12y ago
  I wonder if corporations that uses entirely non voting stock exist.
  - alexeisadeski3 12y ago
    Who would pick the directors?
- georgemcbay 12y ago
  "Attempts to tie CEO interests to owner interests by tying compensation to the company's performance have thus far failed, mostly because a) the fraction of compensation isn't sufficient to overcome the CEOs self-serving motivation or b) the specific tying system can be gamed to the CEO's advantage." and/or c) extrinsic motivators aren't effective for non-mechanical work. http://www.ted.com/talks/dan_pink_on_motivation http://www.ted.com/talks/dan_pink_on_motivation