This Chart Shows CEO Pay-For-Performance is Bullsh*t
Trying to get a grasp on what is truly happening in the economy is like attempting to wrangle an eel out of some seaweed; it’s damned near impossible to really get a hold of it. There are dozens of indicators to look at, each changing from month to month, and each that can be used to build whatever narrative you choose. For example, there is plenty of evidence that the economy is on solid ground after six years of President Barack Obama being in office, and many will cite those indicators as proof of successful economic policies. Yet, on the other hand, the president’s adversaries can take different metrics which aren’t performing as well, say wage growth or housing numbers, and use them to paint a picture of economic distress.
It’s all very muddled and confusing, some might say by design.
Why design such a system, in which the average person has a hard time understanding what is truly happening in the world around them? Well, by keeping most people in the dark, it’s easier to get controversial things by the general public. Case in point: the stock market. Most people would have a hard time telling you how the stock market actually works, let alone get into the specifics of derivatives or futures trading.
This is a similar method that is taken to other subjects, like that of executive compensation. Incredibly high pay for top figureheads and CEOs of the world’s biggest companies are making them some of the wealthiest people the world has ever seen. Meanwhile, an ever-growing percentage of the world’s population lives in squalor, working in slave-like conditions and being victimized by a callous and unfair economic system thrust upon them. Now, that’s not to say that many executives don’t deserve their payday after putting in years of hard work or seeing a world-changing idea come to fruition. But there are a lot of executives who do nothing more than worry about seeing growth on the next earnings report, no matter what the cost.
This is where pay-for-performance compensation models have entered the fray. Many executives receive their compensation in a blend of salary and stock, effectively tying their pay to the performance of the company. This sounds like a great plan, especially from a shareholder’s perspective. If the company does well, the executives get paid more.
Well, as it turns out, that idea is more fantasy than reality.
The chart above was put together by the fine folks at Bloomberg Businessweek, using data collected from Equilar. What you see is a visualization of the data that compares CEO pay from 200 executives with that of their company’s performance. If you’re looking for a pattern, you’ll be hard-pressed to find one. The graph essentially has the aesthetics of a shotgun blast or a Jackson Pollock painting. What it appears to show is that there is no relation to executive pay and how well a company performs.
Essentially, the entire idea behind pay-for-performance compensation model is a bust.
So why is this a problem? Well, there are numerous reasons. For starters, the idea of a pay-for-performance compensation model has been one of the major factors that has let the idea of multi-million, or even billion dollar paydays sit well with the American people. It reinforces the notion that the people at the top of a given company are in it for the long haul, and care about seeing an organization find success, which, in turn, should elevate everyone within its structure.
If that was all based on a false premise, then that’s sure to breed some resentment among the ranks.
The compensation model itself has also been a catalyst behind the explosive heights executive pay has reached over the last decade. In fact, just last year in 2013, average pay for a CEO eclipsed the $10 million per year mark, an increase of 8.8 percent from the previous year according to Politico‘s calculations. So, as executive pay has gone through the roof, everyone else has been stuck with stagnating wages. In fact, the average CEO makes 257 times what the average employee pulls in.
If you’re wondering how income inequality seemingly becomes worse and worse every year, pay-for-performance models would be one of the culprits.
Also, a major issue within this type of compensation framework is the fact that, since their pay is coming in the form of stock, many executives decide that increasing the value of a company’s shares is the most important function of their job. Sure, this is one of the major tenements of any company leader, to produce more value for the shareholders, but when it involves risking the long-term future of a company in order to see the stock price jump a few points, is that really what investors want to see?
By focusing on short-term growth and profit boosting techniques, executives can engage in riskier behavior than they might otherwise. There are reasons for this, as many might fear for their job if positive growth isn’t shown from quarter to quarter, and shareholders can grow restless. So there is pressure to perform. Of course, by tying the pay of the executives themselves to the shareholder’s gains, it greatly improves the chance that earnings will be increased, despite the cost in the long run.
Not only is jeopardizing the long-term integrity of the world’s biggest companies in order to post short-term profit gains unwise, it also can have enormous costs on the rest of the economy. The thousands of individuals that make up the backbone of most companies are not sharing in the gains that have been captured, thus seeing their own purchasing power degrade as wages remain stagnate and the cost of living continues to increase.
The problem is most prevalent in the technology sector, followed by services and consumer goods, according to figures compiled by Equilar. As indicated in the chart above, executives in the tech industry receive a very high portion of their compensation in stock, thereby magnifying the importance of seeing the stock price increase. This may be a factor in why we’re seeing the tech industry continue to bubble up, as well as why so many tech startups and businesses eventually come crashing down.
In the end, what does it all mean, and what can be done about it?
Well, the data, and the visualization of the results on the chart mentioned before, may have board members and shareholders thinking twice about the merits and validity of the pay-for-performance model. Now that there is some statistical proof of the idea’s shortcomings, the model itself should see some phasing-out, once and for all.