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.
"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."
ReplyDeleteI find that hard to believe. Why would a CEO excercise a losing stock option? They wouldnt.
As regards a loss in the value of their stock, its something that happens to everyone not just CEOs. We dont offset those losses against our salaries and claim we "experienced losses in our overall compensation". Thats just bullshit.
As an engineer who's worked in lots of different companies, its clear to me that most CEOs are parasites who contribute or produce little of value for their companies. They are just good at fooling shareholders into allowing them to enrich themselves at the others expense.
German capitalism proves that a democratic workplace is the most productive.
I just noticed you on Vincent Brown and Googled you to see what to expect....
ReplyDeleteCut Social Welfare and leave the poor CEO's alone!!!
Going by this and your defence of John Cochrane that I see on the right hand side you seem out of touch with Economic realities!
Cochrane claims that he and the students of Fama all know about “fat tails” in financial markets, and maybe they did and do. But the guy is the author of a widely used advanced textbook, _Asset Pricing_, many hundreds of pages long, which does not mention the phenomenon of “fat tails” once. It is just la la land stuff. He and Fama long pushed the “strong” version of the efficient market hypothesis, which says that prices reflect fundamental values(property!!). Now they are claiming only to push the weaker version, which basically says that it is hard to beat the market. Duh.
Fair enough Krugman is a clown too but Cochrane has made a bigger fool of himself than any other Economist in the last few years and he's had serious competition for that!
The Question I have for people still in thrall to the Chicago Boys is: what real world events would have to happen in order for you to admit that you got it all wrong?