Why the Best Paid CEOs Run the Worst Performing Companies

'Pay for performance' was supposed to be the answer to accusations that managements' interests were not aligned with those of shareholders. The challenge is that metrics start to degrade the moment they are announced because, in a market-based economy full of smart, highly incentivized people, those measures are immediately gamed by anyone with a stake in the outcome.

Pay, in this case, is often a misnomer. The issue is usually not with salaries, but with stock-based compensation awards. The data suggest, as the following article explains, that the problem is not venality, incompetence or conspiracy (though it probably exists in some cases), but with a misalignment of interests driven by frameworks designed to reward certain behaviors - and almost never to penalize.

There may never be 'an answer' per se, because motivation and ingenuity will almost always outfox systems. Enterprises that continue to outperform expectations by growing leaders who embrace their values and exhibit operational exceptionalism will almost always prevail in the long run. JL

Theo Francis reports in the Wall Street Journal:

Research examined the pay of some 800 CEOs at 429  companies during the decade ending in 2014, and also at the total shareholder return. $100 invested in the 20% of companies with the highest-paid CEOs would have grown to $265 over 10 years. The same invested in companies with the lowest-paid CEOs would have grown to $367. Equity incentive awards now make up 70% of CEO pay in the U.S. The equity portion of CEO pay (should) be more conservative.
The best-paid CEOs tend to run some of the worst-performing companies and vice versa—even when pay and performance are measured over the course of many years, according to a new study.
The analysis, from corporate-governance research firm MSCI, examined the pay of some 800 CEOs at 429 large and midsize U.S. companies during the decade ending in 2014, and also looked at the total shareholder return of the companies during the same period.
MSCI found that $100 invested in the 20% of companies with the highest-paid CEOs would have grown to $265 over 10 years. The same amount invested in the companies with the lowest-paid CEOs would have grown to $367. 
The results call into question a fundamental tenet of modern CEO pay: the idea that significant slugs of stock options or restricted stock, especially when the size of the award is also tied to company performance in other ways, helps drive better company performance, which in turn will improve results for shareholders. Equity incentive awards now make up 70% of CEO pay in the U.S.
“The highest paid had the worst performance by a significant margin,” said Ric Marshall, a senior corporate governance researcher at MSCI. “It just argues for the equity portion of CEO pay to be more conservative.”

Executive-pay critics have long said pay and performance could be better aligned, and in June, The Wall Street Journal reported little relationship between one-year pay and performance figures for the S&P 500. Most longer-term analyses have considered three or five years at a time.
The MSCI study compared 10-year total shareholder return—stock appreciation plus dividends—and cumulative total CEO pay as reported in proxy-filing summary-compensation tables.
The study also examined pay and performance among companies within the same broad economic sectors and found similar results: The top-paid half of CEOs in a sector tended to run companies that performed worse than their peers, while the lower-paid half tended to outperform.
“Whether you look at the entire group or adjust by market-cap and sector, you really get very similar results,” Mr. Marshall said.

One possible factor driving the results, the researchers concluded: Annual pay reviews and proxy disclosures, which discourage boards and executives from focusing on longer-term results. The report recommended that the Securities and Exchange Commission require disclosure of cumulative incentive pay over long periods, to help illustrate a CEO’s pay relative to longer-term performance.