Articles

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 that 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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The “Buy Side” View on CEO Pay

By David F. Larcker, Brendan Sheehan, Brian Tayan

Stanford Closer Look Series. Corporate Governance Research Initiative, September 2016

Executive compensation is a highly controversial topic. Journalists, governance commentators, and members of the American public believe that the majority of CEOs are overpaid. Missing from the discussion, however, is the viewpoint of the institutional portfolio managers that owns shares in these corporations and make buy and sell decisions.

In this Closer Look, we review proprietary survey data from Rivel Research Group examining how institutional (“buy-side”) investors view CEO compensation. We ask:

  • How do buy-side investors and the general public differ in their evaluation of executive compensation?
  • Which constituency is “correct”?
  • What performance metrics are more effective in linking pay with performance: operating or stock-price metrics?
  • How much downside risk should an executive be exposed to?

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Consensus among Global Investors that Brexit will Damage European Economy

June 16, 2016, Morningstar

Investors braced for stock market turmoil in UK and Europe if Britain leaves the European Union

With just a week to go to the EU Referendum, there is almost universal agreement amongst global investors that a Brexit vote would cause havoc on stock markets and damage both the UK and European economy.
This consensus among investors seems in stark contrast to the divided views of politicians about the financial consequences of the UK leaving the European Union.

The study, by the Rivel Research Group found that just 3% of UK investors thought the European economy would improve if Britain was to exit the European Union.

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