The more money chief executive officers are paid, the worse they appear to perform.
This is the conclusion of new extensive research into CEO incentives, confidence and future stock price performance by the University of Utah, Purdue University and the University of Cambridge.
The study also found this to be true whether the CEO is at the higher end of the salary spectrum or not, with their firm performing worse over the three years following a rise in pay.
While smaller studies have been done on CEO incentives, this research took into account data from 1,500 companies for pay and performance over a longer period of time, between 1994 to 2013.
The surprising find that companies with highly paid CEOs perform worse is particularly interesting when you consider it is generally believed that is it worth paying a premium for high level, high profile leaders.
While there will be exceptions here, the study found companies run by bosses paid at the top 10% of the scale had the worst performance, returning a huge 10% less to their shareholders than other leaders.
Additionally, the companies with CEOs paid within the top 5% did on average 15% worse.
Why is this? Basically, it comes down to being overconfident, which leads to “value destroying activities”.
“Higher paid managers exhibit behavior consistent with overconfidence. Further, these overconfident CEOs invest more, engage in more mergers, and experience greater negative returns to the announcements of these mergers relative to other CEOs,” the study reads.
“Most importantly, we find that firms with highly paid CEOs earn significantly lower returns when the CEO is also overconfident. We also find that firms managed by highly paid CEOs experience lower future operating performance.”