Morgan Housel of The Motley Fool responds (paywall) to a fascinating Wall Street Journal article:
$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.
Amazing.
The stat is from a study from MSCI, which ranked CEO pay and total shareholder returns from 2005 to 2015. My first thought was that this makes sense, because the highest-paid CEOs tend to come from the largest companies, and large companies in general have lagged small-cap stocks over the last decade. But the study’s authors removed the largest companies from the sample and found similar results. Higher CEO pay, on average, is correlated with lower returns. Ten years isn’t a long time — I’d love to see a study spanning 30 or 50 years — but it’s still a staggering statistic.
Morgan goes on to note that the last Lehman Brothers CEO was making nearly half a million dollars a day, right before old Nessie ate them they went bankrupt, touching off the Great Recession. While I’m not a deep diver on investing – I generally find that the study that found making a quick decision when faced with a mountain of information is more likely to be right than trying to digest the whole thing applies to me – I do find it fascinating to consider looking at the executive’s pay when making an investing decision. The inverse correlation had not occurred to me – but given how it would pressure a CEO to make decisions for the short-term, it makes sense.
The really interesting point? Morgan points out similar phenomenon has been seen in psychological studies of various sorts – basically, when the motivational rewards are too high, the guinea pigs choke.
