Is there a correlation between a CEO’s pay and shareholder returns? Anytime shareholders invest in a business, they have legal rights that should be protected. Regardless of how large or small their share is, the management of the company should be impacted by their shareholders. Unfortunately, that is not always how business happens in San Diego and across Southern California.
In reality, the CEOs of big companies in the region are often more influenced by the opinions of their board of directors than by their shareholders. Because there are typically too many shareholders that are spread out throughout the area, the board of directors is supposed to monitor the CEO’s performance on their behalf.
However, in about 60 percent of the biggest companies in the United States, the CEO runs the board of directors, which creates an automatic conflict of interest and infringes on the shareholders’ rights. Why should you be concerned about the correlation between a CEO’s pay and shareholder returns?
Thankfully, there are numerous companies who are working to protect the best interests of their shareholders. About 40 percent of companies hire independent chairmen, and that number has nearly doubled in the last decade. In general, that scenario is more beneficial for shareholders. Hypothetical stock portfolios suggest an increase of about 2.75 percentage points in a seven-period when there is an independent chairman.
In another study, researchers also found that there is a direct negative correlation between the amount of money a CEO makes and the amount of his or her shareholders’ returns. According to the study, the relative salary between the CEO and the other executives in the C-suite is also relevant.
When the CEO receives a larger percentage of the salaries than the other top five executives, there is typically a lower stock return for the shareholders. According to a recent article in Smart Money, the correlation is related to the CEO and the board of directors. “A weaker board of directors, the thinking goes, will be more likely to overpay its CEO and less likely to fire him if he doesn’t perform.”
Is there a correlation between a CEO’s pay and shareholder returns? What can shareholders and investors do to protect their investment and ensure proper returns? The Watkins Firm has decades of experience advising San Diego and Southern California shareholders and investors. We invite you to review the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.
