Dr bang dang nguyen

Good CEOs are underpaid!

29 March 2011

The article at a glance

Too many CEOs are paid too little not too much – research in the United States has lessons for the UK too …

Dr Bang Dang NguyenToo many CEOs are paid too little not too much – research in the United States has lessons for the UK too

Dr Bang Dang Nguyen, Cambridge Judge Business School Lecturer in Finance, says his research among top CEOs in the US clearly shows a good CEO is worth their weight in gold, and most are paid too little.

Speaking to the Cambridge Judge Business School expert comment podcast series Dr Nguyen said CEOs were clearly capable of adding value to their firms and that while some were overpaid many others were not:

“Our research tried to bring a straightforward answer. We tried to measure how much a CEO is paid as a measure of firm value, and we found on average a top executive brings home 80 per cent of what they create for the firms.

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“Our research in the US is showing that top executives in the US are not overpaid in relation to shareholder value. Albeit there has been high profile media attention surrounding the fact that a small number of top executives are overpaid and destroying shareholder value, but we found that some very good top executives, 20 per cent of the market in fact, are actually being underpaid in terms of what they contribute to shareholder value.”

Dr Nguyen said deciding what a CEO should be paid was a complex issue but that regulators needed to look at the demand and supply issues in the labour market as a whole and not just focus on one particular firm and what its top executives are paid:

“I think the issue is sufficiently complicated, so we can’t say you should do this or that on executive compensation; however, the results from our research can be used for the regulator to consider. In economics we think the regulator should look at making the labour market more efficient, as opposed to disrupting it by intervening. Instead of saying how much top executives should be paid, the regulator should make the labour market more transparent and efficient. We don’t know any better method than making the labour market more efficient.”

Dr Nguyen admitted that the gap between the lowest and highest paid employees in some firms was very large, even ‘scandalous’ in some cases, but that reducing that gap was not necessarily the right answer to the problem of shareholder value:

“We do recognise that the gap between the compensation of the average paid employees and the CEO in the US has widened and that can create some social issues. But the reason why the shareholders want to create more incentive to CEOs to perform well is because in any public company you have a huge conflict of interest between shareholders, who are the true owners of the firm, and the management team. One of the ways to reduce this conflict is to give the top team more incentive, not less, so when we look into the incentive system for the CEOs I don’t think we can reduce the gap in pay between the average and the top; it is something we have to address as prudently as possible.”

Dr Nguyen put forward two solutions to the problems of top CEO pay, more transparency and more openness in the appointments system:

“We should ask all the top companies to disclose all of the details of the incentive package they offer to the top executives and they should open up the position of CEO to more people. This may help to reduce the very high level of compensation that some firms are offering to top executives.”

He said that clearly some CEOs were worth their weight in gold and that they may be paid relatively little in salary terms but take their pay in other incentive schemes:

“In 1997, when Steve Jobs joined Apple, the firm was almost bankrupt – but nowadays Apple is worth over 300 billion US dollars and the cash salary for Steve Jobs is one dollar a year. That is one of the counter-examples to what people think about CEOs: there are good ones on the market.

“I think that sometimes the media are too focused on only the bad stories, but sometimes the people not in the news are creating news and those in the news are not the most interesting guys in the business. Our research clearly shows that if you are a good CEO creating value for shareholders most of the time you are under paid.”

The paper being discussed was:
Nguyen, B.D. and Nielsen K.M. (2010) “The value of independent directors: evidence from sudden death.” Journal of Financial Economics, 98(3): 550-567 (DOI: 10.1016/j.jfineco.2010.07.004)