Gettin' Paid

Executive compensation has garnered many headlines over the past few years.  Many wonder whether or not C-suite executives are being paid too much.  At the very least, they are compensated much more than in the past when compared to the typical employee.  A study by the Economic Policy Institute found that CEOs of America’s largest firms made $15.6 million on average or 271 times the annual pay of the regular worker in 2016.  Before you get too upset, consider that is down from 299-to-1 in 2014 and 286-to-1 in 2015.  Okay, enough pity for those at the helm of corporate America.  In 1965, the ratio was just 20-to-1 and even as recently as 1989 it was 59-to-1.  So, are they worth it?

Some might argue the pay discrepancy is appropriate.  A study completed by academics from the Singapore Management University, University of Maryland, and Oakland University suggests firms with high CEO pay ratios offer better value/performance.  These researchers concluded that companies have to pay more due to the scarce number of talented corporate leaders available.  The study found firms willing to fork over the additional cash are rewarded as companies with relatively highly paid CEOs tend to make “value-enhancing acquisitions” and are also more willing to replace CEOs if profits lag.  This suggests some reason to believe higher pays is here to stay.  However, others might counter the argument for higher pay by invoking worries about America’s social fabric. 

Since correlation is not causation, there is no way of actually knowing for sure that a higher pay ratio is the force behind the outperformance.  Certainly there were firms executing more efficiently than others in the 1960s and 80s when the ratios were much lower.  As time goes on, Atlas expects to see more headlines regarding compensation distribution.  If anything seems interesting, Atlas will share it with you here.