Firms that claim to value shareholders pay CEOs more regardless of work quality

Washington, Feb. 7 (ANI): Ever wonder why CEOs at poorly performing companies continue to receive exorbitant pay packages? According to a study from a University of Illinois labor professor, firms that trumpet how much they value shareholders actually pay their CEOs more, regardless of the quality of their performance as executives.

Using compensation data from 290 chief executives at large U.S. firms over an 11-year period, Taekjin Shin, a professor of labor and employment relations at Illinois, shows that CEOs at firms with the appearance of a 'shareholder-value orientation' receive greater compensation in the form of higher pay and greater stock options.

"You would expect that if a company has espoused the principle of shareholder-value maximization - that is, focusing solely on maximizing the financial returns for investors through corporate governance mechanisms - then executive compensation should be less, and sensitivity toward the overall performance of the firm should be greater," Shin said.

But the study, published in The Economic and Social Review, finds empirical evidence to the contrary, Shin added.

"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," he said, adding: "And not only has it failed to work, it provides chief executives with further justification for greater pay."

Moreover, when firms strengthen the appearance of having a shareholder-value orientation, CEO pay increases the subsequent year, suggesting that firms tend to adopt monitoring and incentive-alignment governance mechanisms in order to gain the appearance of shareholder-value orientation rather than to curb executive compensation, Shin says.

"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," he added.

According to the study, 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.

The findings also suggest that executive compensation has played an important role in providing incentives for top managers to make strategic decisions that conform to the shareholder-value maximization principle.

"We've known for decades that CEOs have tremendous power and influence over the corporate world," Shin said.

"But it's only been from the 1980s onward 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. The evidence suggests that the opposite has happened, which is kind of a paradox," he added.

Shin chalks it up to CEOs, already politically-savvy insiders, knowing 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 smokescreen 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," he added. (ANI)


Get stories like this on the Yahoo app and discover more every day.
Download it now.