New research shows strong link between CEO pay and firm performance

New research conducted by the LSE's Centre for Economic Performance has found that pay inequality has exploded since 1980, yet the link between high pay and high performance may be stronger than thought.

Since 1980, FTSE100 CEO pay as a multiple of average pay has soared from 11 to 116. Brian Bell, research fellow at the LSE and lecturer at the University of Oxford, notes that while CEOs often come under attack for their high pay "their pay growth over the last decade has broadly matched that of other top earners such as bankers, lawyers and management consultants".

John Van Reenen, director of the LSE's Centre for Economic Performance says that "firms have tried to link CEO pay more closely with performance by increasing the amount that is awarded in shares that only vest if future performance is good". Their evidence shows that this approach is working, developing an incentive structure that sees a strong link between pay and returns.

[CEOs] have seen considerable gains over the last decade. But much of this increase has come in the form of contingent equity-based pay that depends on relative performance. A suggested policy response to “excessive” executive pay is to provide more opportunity for shareholder “voice”. We show that firms with a large institutional investor base provide a symmetric pay-performance schedule while those with weak institutional ownership protect pay on the downside.

You can read the paper in full here.

Related articles