Research Finds no Correlation of CEO pay and performance/market capitalisation

HOW and to what extent pay packages should be structured is a touchy subject. Obermatt, a financial-research company, argues that remuneration should be based on company performance. Its boss, Hermann Stern, says the current system is flawed; he believes earnings growth and shareholder return should determine how much a CEO should be paid. Currently, of the largest companies in America (those in the S&P 100), CEO pay has no correlation with either performance or market capitalisation. By measuring performance against a peer group, Obermatt calculates the “excess pay” companies gave their bosses between 2008 and 2010. Occidental Petroleum, an energy firm, was by far the worst offender. Its boss, Ray Irani, who earned over $200m in 2008 alone, was one of the highest-paid executives in the period, and received almost eight times his “deserved pay”. After shareholder complaints, he took a pay cut and retired last year. Hewlett-Packard’s “overpaid” CEO, Mark Hurd, has since left the company, as has his successor; HP’s shareholders have also exercised their “say on pay” under new rules—though Obermatt’s pay-for-performance metric for the largest firms shows no correlation between performance and shareholders’ voting patterns.