Kissing Up to Shareholders Earns CEOs Bigger Bucks
CREDIT: CEO Image via Shutterstock
It's not performance, but how much they value their shareholders that determine a CEO's salary, new research finds.
A University of Illinois study found that businesses that trumpet how much they value shareholders actually pay their CEOs more, in terms of both salary and stock options, regardless of the quality of their performance as executives.
While the study's author, Taekjin Shin, said many might expect that when a company adopts the principle of maximizing financial returns for investors through corporate governance mechanisms, then executive compensation would be less. However, the opposite proved to be true.
"All these sorts of corporate governance mechanisms intended to curb excessive pay and constrain CEO influence over the pay process is actually working in reverse," Shin said. "And not only has it failed to work, it provides chief executives with further justification for greater pay."
The study, which was based on data from 290 chief executives at large U.S. firms over an 11-year period, also discovered that when firms strengthen the appearance of having a shareholder-value orientation, CEO pay increases the following year. Shin said this suggests that firms tend to adopt monitoring and incentive-alignment governance mechanisms in order to gain the appearance of shareholder-value, rather than to curb executive compensation.
"All sorts of structural appearances by the firm, such as having more independent board members and a greater level of institutional investor ownership — those kind of things are well-intended, but ultimately don't amount to much," he said. "It creates the appearance to outsiders that the firm is really following the mainstream model of corporate governance."
The research shows that by employing such symbolic management tactics, top executives earn greater legitimacy, a better reputation and a higher valuation of both the firm and executive talent.
Shin said that for decades, CEOs have had tremendous power and influence over the corporate world, but that it's only been the last 30 years that shareholders have begun to take a more activist role in publicly traded companies.
"One would expect that with all these kinds of changes and the empowerment of shareholders, the CEO would probably have lost both power and pay, or at least their influence over their pay," Shin said."The evidence suggests that the opposite has happened, which is kind of a paradox."
Shin believes the results prove CEOs, already politically savvy insiders, know how to "game the system."
"They know that the dominant paradigm right now is shareholder maximization and that shareholders are king, so they say, 'Let's at least have a smoke screen of serving them by instituting all sorts of changes in the board of directors, in compensation policy and stock options,'" Shin said. "But those reforms are often just a fig leaf, and serve CEO interests by further justifying their hefty compensation packages."
The study was recently published in The Economic and Social Review.