What a Dead CEO Can Tell You about Shareholder Value

More than half of senior executives are not overpaid, according to research, despite a significant number of shareholder revolts against pay packages and bonuses in the past three years.

In one of the more bizarre research papers of the summer, Bang Dang Nguyen of the University of Cambridge Judge Business School and Kasper Meisner Nielsen from the Hong Kong University of Science and Technology claimed to have found “empirical evidence” that 58% of senior executives are not overpaid. In addition, the paper—titled “What death can tell: Are executives paid for their contributions to firm value?”—found that the average top executive retains 71% of the value they create for shareholders through remuneration.

To calculate the figures, the pair examined how US-listed companies’ share prices reacted upon the news of the death of a serving executive, and compared their salaries to the expected salaries of their replacements.

They looked into the sudden deaths of 149 executives between 1991 and 2008 and analysed share price movements for five days afterwards, comparing the performance to the five days immediately before the unfortunate events. Of those, 63 triggered positive moves in their companies’ share prices, which the authors claimed indicated they were “pocketing more than 100% of the value they created”.

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Nguyen said the research offered a “novel approach to measuring executives’ perceived contribution to shareholder value and its relationship to pay”.

He added: “A large body of research, and many politicians and leaders, argue that executive compensation is excessive. But, without a measure of executives’ perceived contribution to shareholder value, a true assessment is difficult.

“Enacting regulation—especially as a response to social pressure—that punishes all CEOs alike also punishes the company, the shareholders, the taxman and ultimately the ordinary citizen. Results from this research show that the labour market for top executives, while not perfect, does work to some extent.”

Nguyen and Nielsen are no strangers to morbid research: According to the press release announcing the publication of their latest paper, the pair have already contributed research into the sudden deaths of independent directors for the Journal of Financial Economics.

Harvard University’s endowment fund has come under attack from a group of alumni for paying its investment managers too much.

Harvard Management Company (HMC), which runs the $32.7 billion fund, paid $132.8 million in salaries, bonuses, and benefits in the 12 months to June 30, 2013. This was more than double the $63.5 million it paid in 2010, according to Bloomberg.

Nine members of the class of 1969 wrote to Drew Faust, president of Harvard University, claiming to be “astonished” by the rise in compensation. They criticised the pay hikes, which had come despite the endowment underperforming many of its peers. It has still to reach its pre-financial crisis peak of $36.9 billion in assets after losing 27% in the 12 months to June 30, 2009—although its 11.3% return for the fiscal year ending June 30, 2013 marked an outperformance of its benchmark.

HMC staff salaries and benefits were “increasing at a much faster rate than the endowment, which still has a long way to go before it reaches its pre-crisis peak”, they said in the letter.

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A spokesperson for the Ivy League university told Bloomberg: “HMC’s unique hybrid model has saved the university more than $1.5 billion in management costs compared to what an equivalent external management strategy would have cost over the past decade.”

It is not the first time the 1969 alumni have hit out at salary levels at Boston, Massachusetts-based HMC. In 2003, the group criticised a $100 million combined pay package for just five senior staff.

Since 2010, 90% of managers’ pay has been tied to the performance of the fund, and the endowment has vowed to reduce bonuses if it lost money in a financial year.

Harvard’s endowment fund has been dogged by problems since the onset of the financial crisis in 2008. It has spent more than $1.25 billion unwinding debt derivatives which lost money as interest rates were slashed, while real estate investments also hit the portfolio hard during the 2008-09 market crash.

In June this year, HMC president and CEO Jane Mendillo announced her resignation. She will step down at the end of 2014.

Harvard was not the only endowment to give its senior staff a pay boost in 2013: Princeton University gave its top three endowment managers a total of $8.3 million, 39% more than in 2012.