This is a fascinating scatterplot. Boards may say they want executive teams to outperform their peers in value-creation, but it’s hard to see in these figures (or others).
Note that the rise in executive pay over the past 30 years is, however, fully reconcilable with Andrew Leigh’s view from 2007 – that pay increases have been a reaction to increases in firm size:
[A] new theory – propounded by Xavier Gabaix (MIT) and Augustin Landier (New York University) – claims to be able to fully account for the rise in CEO pay. Their point is startlingly simple: CEOs are paid proportionately to the size of their companies, and a wave of mergers has seen the largest companies become larger still. Over the past two decades, they point out, there has been a six-fold increase in market capitalization of large US companies, which perfectly explains the six-fold increase in CEO pay.
So next time someone tells you that CEO pay is all Gordon Gecko’s fault, point out to them that the ‘greed is good’ decade also saw a major rise in firm size. Today’s top executives are now managing substantially bigger companies than their predecessors.
Alan Kohler in the Business Spectator article that brought this to light notes that CLSA also found a relationship between executive pay and corporate size.
Interestingly, Kohler argues that relationship should not exist – “in fact, large company CEOs are surrounded by more support staff, analysts and direct reports so arguably their job is easier”. I have my doubts about this, especially when TSR is being expressed as a relationship between profits and capital rather than in absolute terms. If Business Spectator were making higher a higher TSR than Telstra, I wouldn’t expect Alan Kohler to be making as much as David Thodey.
I’ve been away for a while, and statistics was never my greatest subject.
However, to my naive and innumerate way of thinking, this graph seems to indicate that there is little or no correlation between executive remuneration and shareholder return at all.
Also that there are a significant number of companies that make a profit, but don’t pay executives.
EP – The data on the firms ranking within the top 200 companies (which is why they both go to 200). If they used actual remuneration the higher (exponential) salaries would make the graph a great deal harder to interpret.
So the profitable firms on the far left aren’t paying nothing, they’re just paying the least of the 200 firms in the sample.
Interesting approach plotting ranking against ranking, in order to linearize pretty much any input data you might have; however if “Top 200 Companies” means largest 200 companies, then this graph says nothing about the difference between large companies and small companies — as Alan Kohler is trying to imply.
Maybe worth expanding the sample size to actually include some small and medium companies as well.
if “Top 200 Companies” means largest 200 companies, then this graph says nothing about the difference between large companies and small companies
Yes it does. The ASX200 includes everything from Rio Tinto (market cap circa $110 billion) to the Reject Shop (market cap circa $440 million). That’s plenty of spread in terms of size.
David
An old landscapers trick to get a ‘natural’ looking scatter of flowering bulbs in a lawn ,is to throw potatoes over the back of your shoulder and then plant the bulbs according to the random cluster pattern of the potatoes where they fell.
The graph looks like pretty similar result.
As to size I would guess that very large companies are quasi monopolies/duopolies, and therefore have more fat to feed pet cats with?
This is a fascinating scatterplot. Boards may say they want executive teams to outperform their peers in value-creation, but it’s hard to see in these figures (or others).
Note that the rise in executive pay over the past 30 years is, however, fully reconcilable with Andrew Leigh’s view from 2007 – that pay increases have been a reaction to increases in firm size:
Alan Kohler in the Business Spectator article that brought this to light notes that CLSA also found a relationship between executive pay and corporate size.
Interestingly, Kohler argues that relationship should not exist – “in fact, large company CEOs are surrounded by more support staff, analysts and direct reports so arguably their job is easier”. I have my doubts about this, especially when TSR is being expressed as a relationship between profits and capital rather than in absolute terms. If Business Spectator were making higher a higher TSR than Telstra, I wouldn’t expect Alan Kohler to be making as much as David Thodey.
I’ve been away for a while, and statistics was never my greatest subject.
However, to my naive and innumerate way of thinking, this graph seems to indicate that there is little or no correlation between executive remuneration and shareholder return at all.
Also that there are a significant number of companies that make a profit, but don’t pay executives.
I think that’s the point EP.
It is often claimed that an executive’s pay reflects their value in creating wealth for shareholders. Apparently not so much.
The data do not make sense. Whoever heard of an executive working for almost nothing?
EP – The data on the firms ranking within the top 200 companies (which is why they both go to 200). If they used actual remuneration the higher (exponential) salaries would make the graph a great deal harder to interpret.
So the profitable firms on the far left aren’t paying nothing, they’re just paying the least of the 200 firms in the sample.
Ah, that makes sense.
Interesting approach plotting ranking against ranking, in order to linearize pretty much any input data you might have; however if “Top 200 Companies” means largest 200 companies, then this graph says nothing about the difference between large companies and small companies — as Alan Kohler is trying to imply.
Maybe worth expanding the sample size to actually include some small and medium companies as well.
Yes it does. The ASX200 includes everything from Rio Tinto (market cap circa $110 billion) to the Reject Shop (market cap circa $440 million). That’s plenty of spread in terms of size.
David
An old landscapers trick to get a ‘natural’ looking scatter of flowering bulbs in a lawn ,is to throw potatoes over the back of your shoulder and then plant the bulbs according to the random cluster pattern of the potatoes where they fell.
The graph looks like pretty similar result.
As to size I would guess that very large companies are quasi monopolies/duopolies, and therefore have more fat to feed pet cats with?