Skip to main content

So much for that whole "companies need to pay CEOs giant piles of money to get top talent and ensure profit" thing:

Stock returns plotted against CEO pay. Right next door to random.
Okay, it's not quite random. But it's right next door.
This graph shows the pay of 200 CEOs and the stock returns of their companies:
The trend line—the average of how much a CEO’s ranking is affected by stock performance—shows that a CEO’s income ranking is only 1 percent based on the company’s stock return. That means that 99 percent of the ranking has nothing to do with performance at all. (The size and profitability of companies didn’t affect the random patterns.)

If “pay for performance” was really a factor in compensating this group of CEOs, we’d see compensation and stock performance moving in tandem. The points on the chart would be arranged in a straight, diagonal line.

In short, nope. Further, Bryce Covert notes that:
... even when companies boast that they tie executive compensation to company performance, the country’s largest companies routinely game those systems to ensure they get their bonuses and payouts, such as setting targets so low as to be meaningless or fluffing up their reported profits. ... Worse, out of the highest-paid CEOs over the past 20 years, nearly four in ten were fired, caught committing fraud, or oversaw a company bailout. Incompetence doesn’t stand in the way of a big payday.
Not that any amount of data will ever convince companies that high CEO pay is the wrong way to go—the results they care about are in the bank accounts of top executives. But you'd think eventually it might sink in with the reporters who cover business, and we might start seeing more skeptical reporting about CEO pay.

Originally posted to Daily Kos Labor on Wed Jul 23, 2014 at 08:34 AM PDT.

Also republished by Daily Kos.

Tags

EMAIL TO A FRIEND X
Your Email has been sent.
You must add at least one tag to this diary before publishing it.

Add keywords that describe this diary. Separate multiple keywords with commas.
Tagging tips - Search For Tags - Browse For Tags

?

More Tagging tips:

A tag is a way to search for this diary. If someone is searching for "Barack Obama," is this a diary they'd be trying to find?

Use a person's full name, without any title. Senator Obama may become President Obama, and Michelle Obama might run for office.

If your diary covers an election or elected official, use election tags, which are generally the state abbreviation followed by the office. CA-01 is the first district House seat. CA-Sen covers both senate races. NY-GOV covers the New York governor's race.

Tags do not compound: that is, "education reform" is a completely different tag from "education". A tag like "reform" alone is probably not meaningful.

Consider if one or more of these tags fits your diary: Civil Rights, Community, Congress, Culture, Economy, Education, Elections, Energy, Environment, Health Care, International, Labor, Law, Media, Meta, National Security, Science, Transportation, or White House. If your diary is specific to a state, consider adding the state (California, Texas, etc). Keep in mind, though, that there are many wonderful and important diaries that don't fit in any of these tags. Don't worry if yours doesn't.

You can add a private note to this diary when hotlisting it:
Are you sure you want to remove this diary from your hotlist?
Are you sure you want to remove your recommendation? You can only recommend a diary once, so you will not be able to re-recommend it afterwards.
Rescue this diary, and add a note:
Are you sure you want to remove this diary from Rescue?
Choose where to republish this diary. The diary will be added to the queue for that group. Publish it from the queue to make it appear.

You must be a member of a group to use this feature.

Add a quick update to your diary without changing the diary itself:
Are you sure you want to remove this diary?
(The diary will be removed from the site and returned to your drafts for further editing.)
(The diary will be removed.)
Are you sure you want to save these changes to the published diary?

Comment Preferences

  •  Well, clustering closely around a diagonal line (3+ / 0-)
    Recommended by:
    ericlewis0, JeffW, eztempo

    There are always going to be other factors, natural, human, political, and technical. A correlation of perhaps 50% would be deafening, one of 20% would be convincing evidence, and even 10% would be worthy of a longer-term or larger study.

    But they ain't close, are they?

  •  This is true, but... (2+ / 0-)
    Recommended by:
    RichM, jan4insight

    Not that any amount of data will ever convince companies that high CEO pay is the wrong way to go—the results they care about are in the bank accounts of top executives.

    Corporations are its top executives. There's no separation; executives run companies to benefit the executives running the company.

    Sure, there are some companies who seem genuinely concerned with the well-being of their employees or the world in general, but most execs at public companies are focused on the viability of the business and the short-term profitability necessary to hit bonus goals and placate shareholders.

    That's kinda the problem I have with the ideas of  "run the government like a business" and "governor/president/etc as CEO" as if by default businesses are any more efficient or its leaders any less self-interested than they typical pol or high-level appointee.

    "Believe nothing, no matter where you read it or who has said it, even if I have said it, unless it agrees with your own reason and your own common sense."

    by grape crush on Wed Jul 23, 2014 at 09:08:55 AM PDT

    •  Yup... (2+ / 0-)
      Recommended by:
      grape crush, jan4insight

      This is a fundamental problem with American Capitalism.  The mantra of most publicly traded companies is 'to return maximum value to our share holders.'  No accounting for long term, employees, environment, the country, etc.

      “Socialism never took root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires.” - John Steinbeck (Disputed)

      by RichM on Wed Jul 23, 2014 at 09:25:37 AM PDT

      [ Parent ]

      •  It's the problem with just about any... (0+ / 0-)

        ..'ism' generally, in that for whatever particular economic or governmental system is in place, the benefits of said system will accrue to those privileged enough to either be at the top or be connected to the top.

        The only real difference between those 'isms' is the rate at which those benefits shift upward. The more dictatorial, the faster the shift.

        "Believe nothing, no matter where you read it or who has said it, even if I have said it, unless it agrees with your own reason and your own common sense."

        by grape crush on Wed Jul 23, 2014 at 09:50:07 AM PDT

        [ Parent ]

      •  The mantra is the cover story (2+ / 0-)
        Recommended by:
        RichM, grape crush

        The actuality is that the top execs pay (usually) goes up regardless of actual performance.  Fortune Magazine used to do (I haven't subscribed for years) a yearly article on executive pay - and it always showed a strong inverse relationship between executive compensation and shareholder return in every industry group they studied.

    •  Never give suckers an even break. (2+ / 0-)
      Recommended by:
      JeffW, laurnj

      Congress has the power to pull every corporations 'rights', leases and even existence.

      Oh...they didn't mention that? Congress is the asset manager for our National tax dollar mutual fund.

      Fire them. Vote.

      You can have freedom or ignorance. Never both. - me

      by nolagrl on Fri Jul 25, 2014 at 06:05:03 PM PDT

      [ Parent ]

    •  Most corps. (1+ / 0-)
      Recommended by:
      too many people

      Most of these places could be run cheaper by moving the "administrative assistant" up and firing the CEO.

      I would tell you the only word in the English language that has all the vowels in order but, that would be facetious.

      by roninkai on Fri Jul 25, 2014 at 06:25:48 PM PDT

      [ Parent ]

  •  The fix is in nt (0+ / 0-)

    I voted Tuesday, May 6, 2014 because it is my right, my responsibility and because my parents moved from Alabama to Ohio to vote. Unfortunately, the republicons want to turn Ohio into Alabama.

    by a2nite on Wed Jul 23, 2014 at 09:17:33 AM PDT

  •  Only Dem-leaning CEOs will get scrutinized. (1+ / 0-)
    Recommended by:
    jan4insight
  •  That distribution is in fact random (0+ / 0-)

    There are algorithms that will extract trend lines from those points and assign statistical measures to them, but it's clear from the scattering of points that we're looking at something that is random.  The point is that the given graph has zero predictive power.  When a given CEO salary range is associated with dozens of different stock returns from nearly lowest to nearly highest in just about every such range, the predictive power is zero.  That is, there is no meaningful relationship between CEO pay and company performance.

    The only thing that I find surprising is that there isn't a negative correlation.  Recent work in behavior economics shows that the more administrators are conscious of their income and what will enhance it, the less creative they are and the more they take poor risks.  My guess is that there isn't a negative correlation simply because nearly all CEOs are overly concerned with their compensation, and few of them are working effectively.

    It is a serious myth that private business functions better than government agencies because of free market incentives to business leaders!

    "Trust only those who doubt" Lu Xun

    by LookingUp on Wed Jul 23, 2014 at 09:24:29 AM PDT

    •  I'd like to see the graph of dividend returns... (2+ / 0-)
      Recommended by:
      Jasonhouse, Geenius at Wrok

      ...verses CEO pay levels. That might not be so random.

      Float like a manhole cover, sting like a sash weight! Clean Coal Is A Clinker!

      by JeffW on Fri Jul 25, 2014 at 06:49:10 PM PDT

      [ Parent ]

    •  Highest paid CEOs are the worst performers (0+ / 0-)

      It seems that I may have been right about the expectation of a negative correlation.  There is a more extensive study that backed this up:more money less results

      In addition to increasing the income gap, the trend of compensating CEOs more and more is in fact hurting the corporations that throw this money at their so-called leaders.

      It's way past time to look for more sensible ways to compensate executives and workers.  Those who create value are being cheated.  We now have a money pump from workers to the wealthy, and it's bad for nearly everyone.

      "Trust only those who doubt" Lu Xun

      by LookingUp on Sat Jul 26, 2014 at 08:30:50 AM PDT

      [ Parent ]

      •  How about a zero-compensation system. No, don't... (0+ / 0-)

        How about a zero-compensation system. No, don't laugh. Make the top officer of every corporation that is publicly traded a "full beneficiary" of the company. They get a home, child care, food, travel, medical care, dental, optical and education for themselves and their families paid for. All of it. A (modest) cash striped per diem, and NO MORE. No stock options, no bonds, nothing that's any part of the financial services industry.

        While they are CEO, they can live well. But *only* while they are CEO.

        The money saved by such a system would probably boggle the mind.

  •  We shouldn't cloud the issue with facts. Our (0+ / 0-)

    "leaders" will tell us what we think.

    "The object of persecution is persecution. The object of torture is torture. The object of power is power. Now do you begin to understand me?" ~Orwell, "1984"

    by Lily O Lady on Wed Jul 23, 2014 at 09:44:59 AM PDT

  •  I remember hearing that a sure way to tell that (4+ / 0-)
    Recommended by:
    hbk, dewtx, Jasonhouse, raboof

    a company's stock was going to tank is if the founder bought a big fancy mansion. Note that it has to be the founder, once you put some soap company CEO in charge of a company making tires it really doesn't matter what they do. But when the founder decides to go into semi-retirement and enjoy living in the 30,000 sq.ft. mansion the company is bound to go into the toilet.

    GOP 2014 strategy -- Hire clowns, elephants, and a ringmaster and say "a media circus" has emerged and blame Democrats for lack of progress. Have pundits agree that "both sides are to blame" and hope the public will stay home on election day.

    by ontheleftcoast on Fri Jul 25, 2014 at 06:10:56 PM PDT

  •  Moral Turpitude & Incomptence -- EOE (0+ / 0-)

    (Dressed for Success)

  •  Incompetence, NOT Incomptence --- Sorry. (0+ / 0-)

    (Oh the Irony.)

  •  FYI (0+ / 0-)

    that is just not a statistically correct interpretation of the r squared number....

    In the data shown the dependent variable is the stock return.

    So that .01 is the percent of the ranking stock return which is dependent on the ranking in CEO pay. NOT how much the CEO pay is dependent on the stock return.

    Those are VERY VERY VERY different things statistically.

    I checked 3 or 4 links deep and had no luck finding the original data, so basically you are producing biased political crap based on a biased interpretations of incorrectly interpreted data.

    That must make people feel warm and cozy that you are that much removed from actually understanding the material you are trying to interpret.

    I am going to randomly make guesses as that is what the OP has done.

    so if those are fortune 500 companies each one is facing getting returns of around 10 Billion a year and the average CEO is makeing 10 million a year and I will assume those rankings are about equivilant to percentage changes

    ya I know these are a lot of guesses. But the article has no way near enough real numbers to make any kind of informed estimate so why not?

    So given all that bullshit.

    That would mean

    for every 100k a ceo gets paid. The company would make 1 million..(1% change of ceo to .01% change return)

    That is a good return on investment.

  •  On a second look (2+ / 0-)
    Recommended by:
    sweatyb, Geenius at Wrok

    The use of a regression line with rankings is a bit of a statistical sin, for violating measurement level requirements.

    I completely understand, see and agree with the point, and don't really think it's totally inappropriate, but technically the use of a Gamma or similar statistic would have been preferable.

    We now return you to a discussion of the purpose and content of this diary.

    •  Or plotting pay vs. stock price increase (1+ / 0-)
      Recommended by:
      libera nos

      and drawing the regression line from that. I agree: The methodology here is suspect. I'd rather be able to back up my position with more waterproof data.

      "The great lie of democracy, its essential paradox, is that democracy is the first to be sacrificed when its security is at risk. Every state is totalitarian at heart; there are no ends to the cruelty it will go to to protect itself." -- Ian McDonald

      by Geenius at Wrok on Sat Jul 26, 2014 at 06:33:45 AM PDT

      [ Parent ]

  •  Gimme gimme gimme (0+ / 0-)

    What do I need to do to get a job like this where I get lots of money for a few years without the burden of performance?

    And if I show up at the office, will I get a bonus?

  •  Shareholders need to get more assertive (1+ / 0-)
    Recommended by:
    Jasonhouse

    particularly institutional shareholders.

    In publicly traded companies, non-founder CEOs are employees - not even glorified employees, they literally are employees.

    It is time to start treating them that way - raises commensurate with how well they do, and shitcan their butts when they're not up to the job, no golden parachutes.

    Tired of seeing paid employees, who didn't make the investment risks, hollowing out all the value of a company in their stock options, and then leaving it in disgrace (with their millions in severance) when they can't do the job.

    I'm not talking about founder CEOs.... the Steve Jobs, Bill Gates, Warren Buffets of the world - these guys IMO are owed some deference and bring a lot of value to the table in that their entrepreneurial nature has been demonstrated.

    I'm talking about the paid vulture type.

    Rick Perry - the greatest scientist since Galileo!

    by Bobs Telecaster on Fri Jul 25, 2014 at 06:25:51 PM PDT

  •  I love graphs like this (1+ / 0-)
    Recommended by:
    hbk

    These kind of reports enjoy a posh, safe, comfortable home on my hard drive, but they work hard - I get them out often lol!

    Bodhisattva, won't you take me by the hand. Can you show me the shine of your Japan, the sparkle of your China. Show me, and I'll be there, Bodhisattva, Bodhisattva.

    by thenekkidtruth on Fri Jul 25, 2014 at 06:27:58 PM PDT

  •  Fair Play Fair Pay (1+ / 0-)
    Recommended by:
    hbk

    I would like to see legislation that stipulates the highest compensated person in an organization can make no more than 75 times the lowest compensation for any individual in that organization.

    Yes, I know there would be all kinds of schemes to circumvent the law. So the law would have to cleverly written and strictly enforced.

    But it could be done. And we would be a better country if the fortunes of the highest paid were directly tied to the lowest paid.

  •  whoa, now That's stochastic.... or (0+ / 0-)

    a pack 'O lies

    .... even when companies boast that they tie executive compensation to company performance, the country’s largest companies routinely game those systems to ensure they get their bonuses and payouts, such as setting targets so low as to be meaningless or fluffing up their reported profits. ... Worse, out of the highest-paid CEOs over the past 20 years, nearly four in ten were fired, caught committing fraud, or oversaw a company bailout. Incompetence doesn’t stand in the way of a big payday.

    Warning - some snark may be above‽ (-9.50; -7.03)‽ eState4Column5©2013 "If we appear to seek the unattainable, then let it be known that we do so to avoid the unimaginable." (@eState4Column5)

    by annieli on Fri Jul 25, 2014 at 07:30:10 PM PDT

  •  It's a Snow Storm! (0+ / 0-)

    Well, someone's getting snowed.

  •  Looks pretty random to me. (0+ / 0-)

    You could probably do better divining chicken entrails.  If you have the guts too.  LOL.

    A bad idea isn't responsible for those who believe it. ---Stephen Cannell

    by YellerDog on Fri Jul 25, 2014 at 08:15:54 PM PDT

  •  A couple of things (4+ / 0-)

    I love this graph.  The graph is a very effective illustration and I'm going to use it in my statistics class, but I have to point out a couple of things.

    First, r-squared is 0.01, which means that the correlation coefficient (r)  is in fact 0.1.  With 200 data points, this is in fact a statistically significant correlation.  It's very weak, but it's not actually random, so you are correct calling it "not quite random".

    Second, it's correlating "stock return RANK" vs "CEO pay rank".  Correlating rankings is always a bit iffy.  I would be really interested to see the actual value of CEO pay (including bonuses) vs stock return.

    •  Good catch on the significance of r (0+ / 0-)

      I judged the pearson correlation coefficient to be not quite appropriate, as the numbers are ranks rather than measurements proper, so I digitized the chart and computed kendall's tau for rank correlation.

      The results are back at the office but the number I remember is that p = 0.2, suggesting that pay correlates with performance (by this metric, anyway) no better than one would expect for ranks assigned at random.  Backing off from the strict frequentist interpretation, there might be an effect lurking in there but it's going to be pretty small.

      Vai o tatu-bola escamoso encontrar-me onde estou escondendo? Lembro-me do caminho de ouro, uma pinga de mel, meu amado Parati (-8.75,-8.36)

      by tarkangi on Fri Jul 25, 2014 at 10:23:16 PM PDT

      [ Parent ]

  •  I've always been amazed at the double standard (0+ / 0-)

    that says that "we need to pay CEOs the highest possible salary so we get the best possible person" while also saying "we shouldn't pay teachers much because we want someone who does it out of dedication, and not for the money."

    I would prefer that my 12-year-old son had well-paid amazingly good teachers instead of people who are love the job, but may not be the best possible. (PLEASE note that I wrote "may not be.)

    Unfortunately, our state's largest teachers' union plays into that double standard by running commercials about how teaching is "a calling." I'd much prefer to see commercials that say "teaching is a hard job and we need great people to do it. That means we need to offer high salaries so that we get the best."

  •  Wish I could get a job... (2+ / 0-)
    Recommended by:
    Betty Pinson, Geenius at Wrok

    where I fail miserably after 2 years, but make enough to retire. How do I apply? I can do this!

    Freedom isn't free. That's why we pay taxes.

    by walk2live on Fri Jul 25, 2014 at 10:39:22 PM PDT

  •  Not a single econometrician was harmed (0+ / 0-)

    in conducting this analysis. Not a one...

  •  What idiot (0+ / 0-)

    didn't listen in math class?  Addition and subtraction are not the same.  They are opposite.  I'm starting to think a couple of fifth graders need to give a lecture on math to these bozos.

Subscribe or Donate to support Daily Kos.

Click here for the mobile view of the site