In an influential paper, Bertrand and Mullainathan (2001) show that energy executives are rewarded for high oil prices, which they term pay-for-luck. Almost twenty years later, performance-based pay as a portion of executive compensation has nearly doubled; total executive compensation has also nearly doubled; and new disclosure laws and tax rules have changed the regulatory landscape. In this paper, we examine whether their results and their interpretation continue to hold in this changing environment. We find that executive compensation at U.S. oil and gas companies is still closely tied to oil prices, indicating that executives continue to be rewarded for luck despite the increased availability of more sophisticated compensation mechanisms. This finding is robust to including time-varying controls for the firms' scale of operations, and it holds not only for total executive compensation but also for several of the separate individuals components of compensation, including bonuses. Moreover, we show there is less pay-for-luck in better-governed companies, and that pay-for-luck is asymmetric – rising with increasing oil prices more than it falls with decreasing oil prices. These patterns are more consistent with rent extraction by executives than with maximizing shareholder value.
Top paid US CEOs. How many can you name? Which were the best S&P500 stocks since 2010? What’s the overlap? Which companies made most profit?
Note, Larry Page = $1 salary, Alphabet CEO, but Sundar Pichai, GOOG CEO is at $200m so almost double Hock Tan.
Of course, there are several problems with this simplistic look (length of CEO tenure) and there are several academics who warn of the danger of pay ratios (eg Alex Edmans).
Still it is noticeable that so few CEOs presided over the best stock returns.
And out of the best paid, not that many CEOs preside over the largest profit.
Top 20 paid MSCI World CEOs by total $ comp.
A very similar result to above with just 4 new entries if you look at ex_US companies.
WPP Plc (WPP): Martin Sorrell ($65.3m).
Valeant Pharma (VRX): Joe Papa ($62.7m).
Liberty Global (LBTYA): Mike Fries ($40.1m).
BankGuam Holding (BKG): Tony Pidgley ($36.0m)
H/T Ross Yarrow at Baird. I source further data from Bloomberg.
If you'd like to feel inspired by commencement addresses and life lessons try: Neil Gaiman on making wonderful, fabulous, brilliant mistakes; or Nassim Taleb's commencement address; or JK Rowling on the benefits of failure. Or Charlie Munger onalways inverting; Sheryl Sandberg ongrief, resilience and gratitude or investor Ray Dalio on Principles.
Cross fertilise. Read about the autistic mind here.
More thoughts: My Financial Times opinion article on the importance of long-term questions to management teams and Environment, Social and Governance capital.