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Does Golden Pay for the CEOs Sink Stocks? (A: Yes.) [View All]

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girl gone mad Donating Member (1000+ posts) Send PM | Profile | Ignore Tue Dec-29-09 11:43 PM
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Does Golden Pay for the CEOs Sink Stocks? (A: Yes.)
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Does Golden Pay for the CEOs Sink Stocks?
The Wall St. Journal


Why does it seem that it's always Christmas in corporate boardrooms? And how can investors tell whether those glittering pay packages are worth the cost?

The answer sounds obvious: Pay the boss more for good results now, and you should get even better results later. But the evidence for that is surprisingly weak, and two new studies even suggest that when chief executive officers get paid more, shareholders end up earning less.

The first study, led by corporate-governance expert Lucian Bebchuk of Harvard Law School, looked at more than 2,000 companies to see what share of the total compensation earned by the top five executives went to the CEO. The researchers call this numberwhich averages about 35%the "CEO pay slice."

It turns out that the bigger the CEO's slice of the pie, the lower the company's future profitability and market valuation. "These CEOs," says Prof. Bebchuk, "seem to be trying to grab more than they should."

Finance professor Raghavendra Rau of Purdue University and two colleagues looked at CEO pay and stock returns for roughly 1,500 companies per year from 1994 through 2006. They found that the 10% of firms with the highest-paid CEOs produce stock returns that lag their industry peers by more than 12 percentage points, cumulatively, over the next five years.

Companies at the top of the pay pile, Prof. Rau concluded, award their CEOs an annual average of $23 millionbut leave their shareholders poorer (relative to other companies in the same industry) by an average of $2.4 billion per year. Each dollar that goes into the CEO's pocket takes $100 out of shareholders' pockets.
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