Are CEOs worth it? (R4)

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More or Less 28 min 6 speakers 6 chapters transcribed 2 months ago

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What is the main topic discussed in this episode?

Tim Harford 0:00

This is More or Less, your statistical guide to life, the universe and everything. The programme now airs year-round on the BBC World Service but this is a full-length episode from Radio 4. Hello and welcome to More or Less, opening cans of statistical whoop-ass since 2001. This week, is the Greek rail system so inefficient that it would be cheaper to send every one of its passengers by taxi? And are men better at chess than women? We look at the numbers. But first, are Britain's executives overpaid? It's a question which has been widely discussed this week after Andrew Moss, chief executive of the insurance firm Aviva, was forced out by shareholders, who are, it seems, no longer content to watch him trouser £50,000 a week.

Tim Harford 0:47

There are other recent examples of shareholders flexing their corporate muscles, prompting the suggestion that we're witnessing a shareholder spring, an insurgency which might be strengthened by the government's plans, announced in this week's Queen's Speech, to make shareholder votes on pay binding. But as the BBC's business editor Robert Peston has pointed out, there's little evidence that shareholders are against high pay as such. There's a saying, after all, pay peanuts, get monkeys. What's infuriating shareholders is they seem to be paying millions of pounds and getting monkeys anyway. Aviva's share price, for example, fell nearly 60% during Mr Moss's tenure. All this got us thinking about the link between pay and performance.

Tim Harford 1:28

Are Britain's shareholders getting value for money from their highly paid chief executives? Earlier this year, a Swiss financial research company called Obermat analysed the pay and performance of the top 100 companies in the United States. their research came to a startling conclusion, that there is no correlation between pay and performance in the US. More or less asked Dr Herman Stern from Obermatt to apply exactly the same analysis, not to America's top companies, but to ours, the FTSE 100. He told me first how his original model had worked.

Unknown 2:02

We have analysed the 100 largest companies, the Standard & Poor's 100 companies. We've looked at three years. And we have used the most relevant performance metrics, which is operating cash flow. That's how investors typically value companies. And we have looked at the total shareholder return. And we compared that to the pay that the CEO received.

Tim Harford 2:23

So you've looked at pay. You've looked at performance. Everybody says that pay should be connected to performance. For this S&P 100, what do you find?

Unknown 2:32

I found absolutely no connection between pay and performance. If there was a connection on a scale from 1 to 10, the connection is less than 1.

Are Britain's executives overpaid and is pay linked to performance?

Tim Harford 2:40

Now, you've also done this for the FTSE 100. Presumably, it's different in the UK. We run a tight ship and, of course, chief executives have pay very tightly connected with performance. Yeah?

Unknown 2:54

Well, in the FTSE 100, you would expect more pay for performance alignment because shareholders for a longer time period had a say on pay. but actually the correlation between pay and performance in the UK is just as bad as in the US.

Tim Harford 3:07

In other words, there's no correlation whatsoever or almost no correlation whatsoever? There's no correlation whatsoever, yes. So just to defend fat cat chief executives for a moment, if I'm a chief executive of some high-performing firm and I'm awarded a bunch of share options in 2005, things are going great, and I sit on these share options and then I leave the company five or six years later, and maybe over 2008, 2009, 2010, things haven't gone brilliantly, I'm going to look as though I was paid a huge amount for not doing very much. That might be driving the lack of correlation.

Unknown 3:44

Not really. When you look at other analysis, they come to the same conclusion. A lot of those compensation components are absolute compensation. which means they reward not just the performance of that company, but actually also the wider economic cycles.

Tim Harford 4:01

So you're rewarding a mining company because the price of copper is high, you're rewarding an oil company because the price of oil is high, whereas that's not really a measure of how effectively the company is being managed.