At the end of July, the Wall Street Journal published the findings from a new study from corporate governance research firm MSCI, which alluded to the fact that the best-paid CEOs run some of the worst performing companies and vice versa.


MSCI’s study examined the pay of some 800 CEOs at 429 large and mid-sized US companies during the decade ending in 2014. The study also considered in the total shareholder return of the same companies over the period in question.

MSCI found that $100 invested in the 20% of companies with the highest paid CEOs would have grown to $265 over the decade studied. However, the same amount invested in the companies with the lowest paid CEOs would have risen to $367.

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The findings of this study come at a time when many are questioning the size of the pay packets being awarded to the CEOs of big business and to seem to support the conclusion that higher wages don’t necessarily lead to higher stock prices.

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Executive compensation consulting firm Pay Governance believes that the results of MSCI’s study shouldn’t be taken at face value. Indeed, the consulting firm conducted a detailed review of the MSCI study and concluded that there is a better approach for testing the alignment of CEO pay and performance.

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In a press release published at the beginning of this week, Pay Governance argues that MSCI did not factor in the change in the value of CEO equity awards after the grant was awarded based on the performance of company stock. The Wall Street Journal writes that the MSCI study compared 10-year total shareholder return as stock appreciation plus dividends and cumulative total CEO pay as reported in proxy filing summary compensation tables.

Commenting on the MSCI study, Ira Kay, Managing Partner with Pay Governance said, ““The research featured in the Wall Street Journal article was based on the theoretical grant date accounting value of equity awards to CEOs and does not take into consideration the change in value of CEO equity awards after grant based on the performance of company stock.”

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The total amount of CEO pay is required by regulators to be disclosed in a company’s annual proxy statement, yet these grant values are generally not adjusted by the board based on recent company performance. Therefore, the level of pay achieved through these option grants is set based on market median data reflecting pay for CEOs of the company’s peer group.

The theoretical accounting value of equity awards is often called “pay opportunity” and when it comes to this metric, Pay Governance supports MSCI’s conclusion:

“We agree with the finding that CEO pay opportunity is not correlated with company shareholder returns, as this finding is consistent with our own research,” said Pay Governance Managing Partner Lane Ringlee. “The pay opportunity values are set by company boards to provide CEO pay that is highly motivating and typically competitive with the median of the market.”

Figures support a different conclusion 

Pay Governance tracks the value of CEO equity awards after grant to see how the value of the CEO’s awards changed in comparison to changes in shareholder value (i.e., total shareholder returns). The firm’s most recent assessment of realized pay for the period between 2012 and 2014 shows an alignment between CEO pay and performance by using the figures adjusting for “pay opportunity.”

Companies which achieved a high total return for shareholders had a median three-year CEO realizable pay that was $21 million greater than those companies with the lower total shareholder return. Those companies with a negative total shareholder return over the period had realizable pay that was 39% less than their pay opportunity.

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Photo by jarmoluk (Pixabay)

is very sensitive to changes in shareholder returns when we measure CEO pay-for performance properly using realizable pay. Realizable pay is much closer to the shareholders’ experience, whereas pay opportunity is a purely theoretical value.”

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