Another fascinating paper that I came across last night trolling through old files.
Published by FEEM as a working Paper 89, 2010, titled “Executive Compensation: Facts” it was authored by Gian Luca Clementi and Thomas S. Cooley of NYU and NBER. The link to the paper is here.
In this paper the authors look at the executive compensation in the US from 1993 to 2006.
Per paper: “Notable facts are that: the compensation distribution is highly skewed; each year, a sizeable fraction of chief executives lose money; the use of security grants has increased over time; the income accruing to CEOs from the sale of stock increased; regardless of the measure we adopt, compensation responds strongly to innovations in shareholder wealth; measured as dollar changes in compensation, incentives have strengthened over time, measured as percentage changes in wealth, they have not changed in any appreciable way.”
Given hysteria around the world about executive compensation and commonly held views that:
- Executive compensation is getting more and more generous over time
- Executive compensation is now more unrelated to firm performance over time
- Executive compensation improving generosity is divorce from shareholder wealth
the study findings are enlightening.
The Clementi-Cooley study looks at a comprehensive measure of compensation – a combination of “salary, bonus, the year-on-year change in the value of stock and option holdings, the net revenue from the sale of stock and exercise of options, and the value of newly awarded securities.”
The study does some basic stats. For example, in contrast to the Trade Unions’ claims that the average US executive compensation for larger corporations was $10.8mln in 2006, the study shows that due to a significant skew in the data, the average metric is meaningless. The median compensation for the largest corporate executives in the US therefore, was much smaller (although still substantial) at $4.85mln.
The study also reflects on the well understood, but rarely cited fact that due to significant share of compensation of CEOs being in the form of stock and stock options, in many years, many CEOs actually experience losses in terms of their overall compensation, not gains.
The study is certainly worth reading as it contains factual analysis unencumbered by ideological bull usually found in the media.