Source: Tampa Bay Business Journal Online Daily
While there has been growing outrage in recent years over what has been viewed as excessive compensation, CEOs who make a lot of money actually bring value to their company and offer greater dividends to stockholders, a new University of Florida study finds.
CEOs who were paid more than their peers increased a firm’s return on its assets, a measure commonly used to assess company performance, the study found.
“We didn’t look at the issue of whether CEOs are overpaid relative to some ethical or moral standard,” said Henry Tosi, a UF management professor, in a news release. “We were interested in what happens when they are overpaid or underpaid relative to the labor market.”
Tosi conducted the study with Eric Fong at the University of Alabama in Huntsville and Vilmos Misangyi at Pennsylvania State University. The researchers determined a CEO’s market value based on a formula that considered a firm’s size, profitability and location; and whether stockholders were strong enough to influence the firms’ compensation strategies.
The study included 932 CEOs across 30 industries between 1990 and 1999 and drew comparisons from 2,955 CEO salaries. CEOs who were paid less than the market rate either left the company or expanded its size as a way to increase their own salaries because company size is the biggest predictor of CEO earnings, Tosi said. The most damage to CEO departures occurred in owner-controlled firms, where at least one equity holder owns 5 percent or more of the stock, Tosi said. Underpaid CEOs in these companies were more likely to leave their jobs than were their counterparts in firms that were manager controlled or owner managed, he said.
Conversely, overpaying CEOs increased profits more for owner-controlled firms and owner-managed firms, where the CEO holds more than 5 percent of the stock, than manager-controlled firms, where no single equity holder has more than 5 percent of stock, he said.
Despite the findings, Tosi said criticism about excessive CEO pay is not overblown.“To interpret our findings as a reason to overpay CEOs would only further contribute to the ratcheting effect that leads to excessive CEO pay,” he said.
