Free Market Failure?
TOP-PAID CEOs DON'T DELIVER TOP-NOTCH RESULTS
| Here is a news announcement from a group called United for a Fair Economy. |
NEW REPORT INDICATES HIGH LEVELS OF CEO PAY FORESHADOW POOR STOCK PERFORMANCE
|
"When Business Week releases their list of the ten companies with the
highest paid CEOs for 2000, that would be a good list of stocks to sell
short." --- Scott Klinger, report author
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A new study reveals that high-priced executive compensation plans reward past performance more than sustained business success. While top-paid CEOs are expected to guide their corporations to superior performance relative to industry peers, their performance has been mediocre at best, according to the report released today by United for a Fair Economy, "The Bigger They Come, The Harder They Fall."
"CEOs justify their pay packages by saying they generate tremendous wealth for shareholders. But itıs a myth that CEOs are paid for excellence. Typically, their companies donıt deliver excellence," says Scott Klinger, report author and co-director of the Responsible Wealth project at United for a Fair Economy. "Companies with more limited wage gaps are actually better bets for shareholders."
The report examines the stock price performance of the companies headed by the ten most highly compensated CEOs for each of the seven years between 1993 and 1999. The stock performance of each company was compared to both the S&P500 and the companyıs peer group over one-year and three-year time periods. In six out of the seven one-year time periods following a CEOıs appearance on the top ten list, at least half the companies under-performed the S&P500. In 40% of the cases, the companies trailed the S&P500 by more than 15 percentage points.
The stock performance of the companies with the CEOs rated number one in each year is even more dismal. If someone had invested $10,000 in the company with the highest paid CEO on December 31, 1993, held it for a year, then sold it to buy stock in the next yearıs pay leader and so on, by the end of 1999, the $10,000 investment would have eroded to $3,584. A $10,000 investment in the S&P500 over the same period would have grown to $32,300, more than nine times the pay leadersı portfolio.
The companies examined in the study performed even worse when compared to their industry peers. In each of the five three-year periods examined, between 50% and 71% of the companies trailed their industry peers
One example is Disney, whose CEO, Michael Eisner, was one of the ten highest paid CEOs of the 1990s. Between January 1, 1993, and February 28, 2001, Disney stock returned just 128.3%. By comparison, the S&P Entertainment Index saw a return of 163.3% and the S&P500 saw a 204.2% return.
Other major companies covered in the report are Intel, Citigroup, Lucent, Cisco Systems, Tyco International, HJ Heinz, General Electric, Sears, Goodyear, Coca-Cola, Greentree Financial, Cendant, Conseco, Health South, IBM, Computer Associates, and Andrew Corporation.
Among other findings, "The Bigger They Come" indicates that it is not shareholders alone who should worry about escalating pay packages for executives. In each of the years between 1994 and 1999, at least 50% of the companies announced significant layoffs within three years of the CEO appearing on the Business Week top ten list.
Responsible Wealth has filed shareholder resolutions related to executive compensation at seven companies. The companies are Disney, Fleet, Citigroup, Raytheon, Household International, Exxon Mobil, and AT&T. The resolutions urge companies to link CEO pay to improved performance in customer satisfaction, employee satisfaction, or performance on social issues such as predatory lending. The text of each resolution can be found on the Responsible Wealth website, www.responsiblewealth.org.
Responsible Wealth, a project of United for a Fair Economy, is a network of over 450 businesspeople, investors and affluent Americans in the
top 5 percent of income and wealth who are concerned about growing economic
inequality and working to promote widely shared prosperity.
United for a Fair Economy is a national organization based in Boston that
provides educational resources and supports grassroots groups and
legislative action to reduce economic inequality.
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The full report is now available in PDF format on the WWW at www.ufenet.org
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