Stock-Based Bonuses, Share Values Linked : Compensation: Rewarding executives with those healthy options is also good for investors, a new study finds.
Companies that reward chief executives with big stock grants consistently create greater share value for investors than firms that do not, says the annual executive compensation study released Wednesday by the United Shareholders Assn.
The study was conducted for the Washington-based shareholders’ rights group by Harvard Business School professor Kevin J. Murphy, an executive-pay specialist, who analyzed data gathered from 1,000 of the nation’s largest corporations.
USA’s report is likely to influence the often-emotional debate on executive rewards. In the last year, critics singled out huge stock-option awards as particularly offensive because, they argued, companies often use them to line executive pockets surreptitiously, since no dollar value has to be disclosed at the time of a grant.
The outcry became so intense that on Oct. 16 the Securities and Exchange Commission enacted new regulations that require companies to estimate the value of future stock grants for the 1993 proxy season.
But USA President Ralph V. Whitworth said the survey of 1991 executive pay “provides strong support for our long-held contention that it’s much more important to focus on how CEOs are paid rather than how much they are paid.” He added that USA will “vigorously press corporate directors to devote a much higher proportion of the CEO pay package to stock-based incentive programs.”
For the survey, Murphy collected data from proxy materials to calculate how much chief executives earned in 1991 for each $1,000 their shareholders gained in stock-price appreciation and dividends. (Executive pay is defined as stock ownership, restricted stock, stock options, long-term performance awards and cash compensation.)
The results were ranked according to a measure he calls “pay-performance sensitivity.” Ranking highest in pay-performance sensitivity, Philip H. Knight, chief executive of Beaverton, Ore.-based Nike, earned $680.77 in 1991 for each $1,000 increase in shareholder value. John Lobbia, CEO of Detroit Edison, ranked last, earning only 2 cents per $1,000 increase in shareholder value.
The median of all companies was $5.44 in CEO pay per $1,000 of shareholder value created. The only California company in the top 10 is Los Angeles-based Neutrogena, whose chief executive, Lloyd E. Cotsen, earned $394.87 for each $1,000 shareholder gain.
Murphy’s data suggests that companies with the highest pay-performance sensitivities have outperformed companies with lower sensitivities over the last one-, five- and 10-year periods. “Although these results do not prove that the superior performance was caused by the higher incentives, they are certainly consistent with the view that shareholders benefit from CEO incentives,” he said.
The survey points out, however, that stock-based compensation programs are a relatively minor element of overall pay. More than 70% of CEO compensation is made up of salary, bonus and other cash-based programs.
