Study shows company results and CEO pay are closely linked

WAGES for company bosses are strongly related to their working performance, rising and falling with their firms, according to the Centre for Economic Performance.

While the share of income for FTSE-100 CEOs has grown dramatically in the past 35 years, an increasing proportion is made up of performance-conditional grants, and pay in shares, a study by the group has found.

The top per cent of earners drew 5.9 per cent of income in the UK, in 1979, rising to 15.4 per cent in 2007. However, evidence since 2012 has suggested that the ratio may be correcting itself.

The academics say that sixty per cent of the rise in top incomes over the last decade has gone to those working in banks, rather than those managing companies. “The clear message is that those working in the financial sector have been the key winners over the last decade”, they added.

The research also found that pay was most closely correlated with performance when firms had more institutional investors to hold executives to account. The paper found that institutional investors were likely to punish management when results were poor as they rewarded positive results.

The authors attributed this to more dispersed investors finding it more difficult to coordinate with each other.

The study has been published in the May edition of the American Economic Review.

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