CEOs are worth every penny
Chief executives’ whopping pay cheques are not only justifiable but vital to overall business success, according to a new research.
The ten-year research, conducted by a senior finance lecturer at Massey University’s school of economics and finance Dr Candie Chang, concluded if the company has been performing better than competitors the market reacts more negatively to the news of the chief executive’s departure in anticipation of shareholder wealth loss.
Dr Chang said a good chief executive officer is worth his or her high salary, bonuses and stock options, despite the somewhat jaundiced public view of high profile excesses revealed during the company collapses of recent years.
Findings suggest the higher the pay of the departing chief executive compared to other executives in the company, the more negative the stock price reaction.
Firms that lose a highly paid chief executive suffer a slump in performance after the departure if the pevious performance had been positive.
“Collectively, our results provide strong support for the notion that firm value and performance are not simply outcomes of the firm’s core competency, product markets, or luck. Chief executive talent matters and is rewarded internally and recognised by external marketsm,” she said.
The research, which studied 298 chief executive departures in the US in the decade from 1992 were, also focused on where chief executives end up when they leave their companies.
Two extremes have been found: former chiefs either do not have management positions within three years, or move up to bigger firms or better paying jobs.
“The results suggest that the managerial labour market associates higher pay and better prior performance with higher chief executive ability and rewards them accordingly.”
Dr Chang's research paper called CEO Ability, Pay, and Firm Performance is due to be published in the United States journal Management Science this year.