New research suggests the more CEOs are paid, the worse their companies do throughout the next three years.
The finding relates to executives at for-profit companies, as performance is measured through stock and accounting performance, according to a Forbes report.
Researchers at three universities studied 1,500 companies with the biggest market caps, examining pay and company performance in three-year periods from 1994 through 2013. They compared companies' revenues and profits to those of like companies in their fields.
The authors were surprised find that the more CEOs got paid, the worse their companies did. Further: The negative effect was most pronounced in the 150 firms with the highest-paid CEOs.
As a group, companies run by CEOs paid at the top 10 percent of the scale had the worst performance, returning 10 percent less to shareholders than did their industry peers.
Study authors said overconfidence is a factor for this counter-intuitive conclusion. CEOs who are paid most "ignore disconfirming information and just think that they're right," study author Michael Cooper, PhD, with the University of Utah's David Eccles School of Business, said in the report.
"That tends to result in over-investing — investing too much and investing in bad projects that don't yield positive returns for investors," he said.
The study also found a link between CEOs' tenure and company performance. The longer CEOs were at the helm, the worse their companies did. Why? Dr. Cooper said those CEOs are able to appoint more allies as board members, who then go along with the CEO's poor decisions.
"For the high-pay CEOs, with high overconfidence and high tenure, the effects are just crazy," he said in the Forbes report. Those CEOs return 22 percent less in shareholder value over three years as compared to their peers.
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