Opinion: Big investors have a different take on CEO pay than Nobel-winning academic theories

By Brendan Sheehan

Investors think executive compensation has become increasingly disconnected from companies’ real performance

On Monday, the Nobel Prize for Economics was awarded to Oliver Hart and Bengt Holmström, two U.S-based professors. A significant section of their work focuses on how companies pay CEOs and senior executives, and their findings, along with many other academics, have contributed greatly to a significant shift in the design (and size) of CEO pay over the past few decades.

Yet while there have been many important advancements in understanding how compensation is linked to behavior, there are some significant disconnects among the academic theory (developed in part by the two Nobel laureates), its practical application and the opinion of investors.

What is often missing from conversations surrounding CEO pay is the opinion of the large, sophisticated investors who own significant holdings of most companies in the country. And they tell a different story from the academics.

Executive compensation has, in their eyes, become increasingly disconnected from the real performance of companies. While academic models suggest aligning management’s interest with those of shareholders through various applications of performance-based equity and options, many of these investors feel that modern pay structures overly favor CEOs and that many are able to garner outsize rewards compared with shareholders.

That many of them feel CEOs interests aren’t well aligned with their own is reflected in an increase in mainstream investors voting against CEO pay packages. For example, BNY Mellon voted against 38.4% of pay packages presented to it in 2016, and Calpers voted against 13.8%.

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