Tuesday, August 20, 2019

Companies with overpaid CEOs have markedly underperformed the S&P 500

The companies with overpaid CEOs we identified in our first report have markedly underperformed the S&P 500.

Two years ago, we analyzed how these firms’ stock price performed since we originally identified their CEOs as overpaid. We found then that the 10 companies we identified as having the most overpaid CEOs, in aggregate, underperformed the S&P 500 index by an incredible 10.5 percentage points and actually destroyed shareholder value, with a negative 5.7 percent financial return. The trend continues to hold true as we measure performance to year-end 2018. Last year, these 10 firms again, in aggregate, dramatically underperformed the S&P 500 index, this time by an embarrassing 15.6 percentage points.

In analyzing almost 4 years of returns for these 10 companies we find that they lag the S&P 500 by 14.3 percentage points, posting an overall loss in value of over 11 percent.

Consistent with our 2018 report, this year we used a two-ranking methodology to identify overpaid CEOs.
1. The first is the same HIP Investor regression we’ve used every year that computes excess CEO pay assuming such pay is related to total shareholder return (TSR). 
2. The second ranking identified the companies where the most shares were voted against the CEO pay package. 

These two rankings were weighted 2:1, with the regression analysis being the majority. We then excluded those CEOs whose total disclosed compensation (TDC) was in the lowest third of all the S&P 500 CEO pay packages. The full list of the 100 most overpaid CEOs using this methodology is found in Appendix A. The regression analysis of predicted and excess pay performed by HIP Investor is found in Appendix C, and its methodology is more fully explained there.

From the article