“Concentrations of Power: Why Internal Pay Equity Matters”

From the GMI Newsletter – Large gaps between the compensation of CEOs and other named executives do not necessarily indict the CEOs as imperial or the boards and senior management teams as ineffectual. Any quantitative or binary measure of counter-productive concentrations of power requires thoughtful application to specific companies.

Still, academic research supports the idea that large inequities in NEO pay may negatively affect corporate performance. A 2010 study by Harvard professors Lucian Bebchuk, Martijn Cremers and Urs Peyer found that the percentage of aggregate NEO pay that went to the CEO — also called the CEO pay slice — was negatively correlated with firm value. This result held true even after accounting for many other variables, including industry, CEO tenure, CEO status as owner or founder, and overall compensation levels at the company compared to peers. The study also demonstrated that a larger CEO pay slice correlates with lower profitability; that the stock market responds less positively to acquisitions made by firms with a large CEO pay slice; and that CEO turnover at such firms is less sensitive to performance.

Related GMI Ratings Publications

Key Metrics Series: Internal Pay Equity– GMI Ratings' Internal Pay Equity metric helps investors identify companies where the CEO's Total Summary Pay for the last reported period is more than three times the median pay for the other named executive officers. Investors may wish to examine the governance of such companies to see whether the CEO is dominating the firms in ways that may pose risks to firm value and performance.

The Board Director Training Institute (BDTI) is a "public interest" nonprofit in Japan dedicated to training about directorship, corporate governance, and related management techniques. It is certified by the Japanese government to conduct these activities as a regulated nonprofit. Read a summary about BDTI here, and see a menu of its services for both corporations and investors here.

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