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January 08, 2008

pay for non-performance

Dean Baker on stock returns and CEO pay:

The much broader S&P 500 index rose by just 3.5%, slightly less than the rate of inflation in 2007. In other words, the real return for most stockholders was roughly equal to what their stock paid out in dividends - not a terribly good story...If we go back 10 years, we find that the S&P 500 has risen by a cumulative total of 52.6% from December 1997 to December 2007. After adjusting for inflation, the increase was 17.3%, which translates into real growth of just 1.6% a year. Add in a dividend yield of approximately the same size and we get that the average real return on stocks over the last decade has been 3.2%, a bit lower than the yield that was available on inflation-indexed government bonds 10 years ago...This brings us to the topic of CEO pay. We saw an explosion in CEO pay that began in the 1980s and has continued into the current decade...The ratio has been perched between 200-to-1 and 300-to-1 since the late 1990s, with CEOs at major companies routinely pulling down pay packages in the tens of millions of dollars, and running into the hundreds of millions in good years...This explosion of pay at the top was justified by many economists based on the returns that they produced for shareholders...While this argument may never have been terribly compelling (it would have been hard to keep a company's stock prices from rising in the 1990s bubble), it clearly is not true today.

Posted by Price at January 8, 2008 09:46 AM


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