Following on last week's release of its annual S&P 500 CEO pay study, the Wall Street Journal featured a piece this week on the purported gap between CEO pay and performance, noting that "the best paid CEOs don't necessarily run the best-performing companies." The Journal argued that the 10% of CEOs with the biggest raises last year had only middle-of-the-pack TSR, while companies with top 10% TSR had lower CEO pay. However, the study is limited by the fact that it compares Summary Compensation Table pay with one-year TSR, with predictably illogical results, given that Summary Compensation Table reflects a mixture of current and future potential pay that is not likely to be aligned with TSR over a one-year period.
The Journal also cited an additional study,"CEO Pay is Indeed Decoupled From CEO Performance," co-written by Herman Aguinis of George Washington University and published in the Management Research Journal of the Iberoamerican Academy of Management. The study compared average CEO pay (adjusted for company size) and average performance (expressed by several metrics including TSR, EPS and return measures) across the tenures of more than 4,000 CEOs in 22 industries. It found that among the top 10% highest-performing CEOs, only 20% were also in the top 10% of pay, and this effect was even more pronounced at the extremes, showing very little overlap between the top 1% of performers and earners. Aguinis concluded from this that certain CEOs are overpaid while others are significantly underpaid, since they are performing at a higher relative level than they are earning. However, as a response by University of South Carolina's Pat Wright and Anthony Nyberg noted, this may be better attributed to the misaligned timing of pay and performance metrics and to the distortionary effect of one-off compensation involved in the hiring and separation of CEOs.