What a Dead CEO Can Tell You about Shareholder Value

Two academics claim to have proven categorically that more than half of senior executives are not overpaid.

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.

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