Board compensation committees: CEO pay and market cap performance with implications for investors

Abstract

Board of Directors’ compensation committees currently have no pay provisions requiring CEO or top executives’ compensation claw-backs for market capitalization destruction which could have huge impacts on such top executive pay. For example, CEO pay was correlated with market capitalization performance for 24 companies in the metal mining, primary metal, and coal mining industries. Simple correlation tests of 2013 total CEO pay with market capitalization destruction over the five-year period, January 2011 through December 2015, yielded a 74% weighted average strong correlation. The total annual pay for these 24 CEOs was $198 million or an estimated $1 billion over the five-year period from 2011-2015. During this same five-year period, the market capitalization for these 24 companies decreased 73% or $180 billion. During this same five-year time period, the S&P 500 Index increased 63%. Some corporate governance researchers (Kostyuk, 2014 and Hilb, 2008) have advocated: “Pay for Performance, not Presence” which could include such correlations with claw-back provisions as part of executive compensation packages from Board of Directors’ compensation committees.