New Study: Paying Top Salaries Does Not Guarantee Good Results

We recently wrote about the pay of top athletes and how the outlandish compensation paid to attract or keep a superstar often backfires as performance and pay often fail to correlate. According to a new study by the Institute for Policy Studies, paying a “superstar” chief executive officer a very lucrative salary may similarly backfire. The study found that approximately 40 percent of the country’s highest-paid CEOs were either fired, prosecuted for fraud or received government bailouts.

Here’s a brief summary of what researchers found:

• CEOs whose firms either ceased to exist or received taxpayer bailouts after the 2008 financial crash comprised 22 percent of the CEOs in the study.
• An additional eight percent of the CEOs studied were terminated. Despite their poor performance, they received an average of $48 million in compensation on their way out the door!
• CEOs in charge of corporations that incurred significant fraud-related fines or penalties accounted for another eight percent of the top-paid CEOs.

Some of the names listed on the report are very familiar. For instance, Enron’s Kenneth Lay made the list of top paid CEOs for four years straight before a massive accounting fraud toppled the energy company in 2001. Several years later, Lay was convicted of fraud and conspiracy for his role in the scheme.

The report comes as the Securities and Exchange Commission begins the process of resurrecting a Dodd-Frank rule that would require public companies to publicly report the pay discrepancies between their workers and their CEOs. According to the Institute for Policy Studies, CEOs at top companies took home approximately 354 times as much pay as the average American worker in 2012.

Under the latest proposal, companies must disclose the ratio between CEO pay and the median compensation of a sample of employees. The SEC’s initial rule, which was deemed overly burdensome by the business community, required all employee compensation to be taken into account. The SEC is expected to release the final rule this month.

A fundamental paradox lurks in all of this.  Does pay correlate to performance, whether the employee is on the top or the bottom of the heap?  If not (as frequently the case), how can employers formulate compensation policies to promote positive, productive behavior in employees of whatever rank that reward properly measured, future performance?  As we witness so many examples of “off the rails” wage practices, whether in the private or public sectors, it is obvious that the managers of the enterprise must do better on behalf of the owners (shareholders and/or taxpayers, as the case may be).

If you have any questions about this study or would like to discuss the legal issues involved, please contact me, Gary Young, or the Scarinci Hollenbeck attorney with whom you work.