The Relationship Between Salary and Value

VERY OFTEN MANAGERS EARN MORE THAN THEY SHOULD, IF COMPARED TO THE CONTRIBUTION THEY GIVE TO THE COMPANY, ESPECIALLY AT THE HIGHEST LEVELS

A new paper by Arnaldo Camuffo, Russ Coff (University of Wisconsin-Madison) and Aneesh Datar debunks the myth of the super CEO but not the myth of the superpaid CEO. Comparing CEOs’ value creation (contribution to firm performance) and value capture (CEO pay), in Misalignment of Contribution and Pay: When do CEOs capture more (or less) than the value they create? The Authors conclude that a CEO’s total pay varies wildly even if their contribution to corporate results is pretty similar.
 
“The standard deviation (a measure of dispersion of a variable) of CEOs’ effects on value capture is more than five times the standard deviation of CEOs’ effects on value creation”, Prof. Camuffo says, “and the difference is much stronger, up to 1,000 times, when we use measures of a CEO contribution that draw on proxy financial benefits to shareholders”.
A Professor of Management at Bocconi, Arnaldo Camuffo reaches this conclusion using a sample of more than 1,200 companies that have been in the Fortune 1000 list at least once between 2002 and 2014. In order to isolate the CEO effect, Camuffo and his co-authors observe what happens, in terms of firm performance, around a change of a CEO, controlling for all the external characteristics that can contribute to such performance, finding a notable misalignment.

“Our findings also suggest that there is a misalignment between value creation and value capture at the top level. In other words, many CEOs capture more value than the value they create”, Prof. Camuffo says. “This finding is consistent with the argument that at certain positions managers disproportionately appropriate the value created from human capital. This mechanism, as we’ve found in other studies, could be opposite at middle management levels, where managers create more value and are not compensated accordingly”.


Read more about this topic:
The perfect super CEO
No Longer a Family Matter
Breaking the Rule of the Firstborn
The Political Influence of CEOs
 

by Fabio Todesco