Nov. 8, 2011 — As the furor over CEO compensation at U.S. companies remains high, new research shows that the pay of executives is closely aligned with their actual performance. High-performing companies tend to have relatively highly paid leaders while low-performing companies compensate their CEOs at much lower levels, according to a new study by Pay Governance, LLC.
A review of 2011 SEC proxy filings for nearly 400 companies demonstrated strong alignment of a company's stock price performance with realizable CEO pay. Executives at high-performing companies earned more than their counterparts at firms delivering less value to shareholders. These findings do not support charges by critics in the media, public, and among regulators, government officials and some shareholders that CEO pay is generally not proportionate with the company's performance.
"Contrary to claims made by compensation critics, there is a very strong relationship between pay and performance as reflected through realizable pay," said Pay Governance managing partner Ira Kay. "These findings are consistent with other pay-for-performance research we have done on thousands of companies over the past 10 years, as well as industry studies performed for many of our clients."
The Pay Governance study found that over a three-year period, cumulative realizable pay from stock incentives at high-performing companies was $19 million — 55% higher than at comparable low-performing companies. Similar results have been found in other studies conducted by the firm.
The gulf between high- and low-performing companies is consistent with striking differences in total shareholder return (TSR). The high achievers realized a 5.6% TSR over three years compared to -8% for the others. For a typical company with a $10 billion market cap, this disparity translated into a difference of almost $1.4 billion in valuation.
Most critics of CEO pay tend to only look at pay opportunity — target cash compensation and the value of equity incentives on the date of grant — which can create the appearance of high pay compared to performance. Pay Governance conducted its evaluation of CEO compensation using a realizable pay metric — the best representation of an executive's actual pay during a particular time period. This figure is the sum of actual cash compensation earned, the aggregate value of in-the-money stock options, the current value of restricted shares, actual payout from performance share or cash plans, plus the estimated value of outstanding performance share or performance contingent cash.
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