“The best-paid CEOs don’t necessarily run the best-performing companies,” according to a recent article in The Wall Street Journal.
The article explains that, although corporate boards try to link top management compensation to performance, the two “often don’t match up, and 2017 was no exception.” It cites data (from MyLogIQ LLC and Institutional Shareholder Services) showing that among S&P 500 CEOs who received raises last year, the 10% who got the highest bumps scored “in the middle of the pack in terms of total shareholder return. Similarly, the 10% of companies posting the best total returns to shareholders scored in the middle of the pack in terms of CEO pay.”
One reason for the disparity, according to George Washington University professor of management Herman Aguinis, is that corporate boards often set compensation by benchmarking the averages at a peer group of companies and setting performance targets accordingly. But his research (a study analyzing compensation of over 4,000 CEOs) has shown that “much like with professional athletes,” there are vast differences in the performance of CEOs (several specific examples are cited).
In fact, the study showed that in 2017 “only two out of the 20 highest-paid CEOs who didn’t leave their jobs before the end of the year landed in the top 20 for shareholder return.”
Aguinis says, “Stars are often underpaid, while average performers are often overpaid.”