Tue, 30 Jul 13 at 13:07 | No Comments Yet
Pondering his bank balance
Corporate executives are sometimes caricatured as grasping and self-centered, grabbing as much cash as they can for themselves rather than building their companies long-term.
While they probably wouldn’t use that language, academics have studied the question, to see just how driven by “short-termism” CEOs might be. A recent paper suggests the caricature might be aligned with reality.
Here’s the takeaway:
Longer CEO pay duration is negatively related to the extent of earnings-increasing accruals.
Hmm, perhaps that needs some unpacking.
“Pay duration” – is the CEO invested for the long term, with (for example) stock options that vest over years or decades, or is he just snaffling up as much cash as he can? (Yes, “he” — there are a few, very few, female CEOs, but men dominate.) The longer the duration the better, from the company’s point of view.
“Earning-increasing accruals” – fun and games in the financial statements. These are are paper entries, having nothing to do with actual cash flow, that make results look better. While sometimes legitimate, too many such accruals should be a red flag to auditors.
“Negatively related” – In other words, when the CEO is using accounting tricks to artificially boost the bottom line, he’s also likely to be stripping off as much cash for himself, as fast as he can. And why not? The fun and games will end, probably sooner rather than later, and the CEO will be leaving to spend more time with his family. Of course he wants his bank accounts (offshore, probably) topped off.
If you think I’m being ungenerous in this interpretation, check out the paper itself.
There’s a conceptually simple solution to this problem, by the way: a maximum wage. Limit executive compensation to either a fixed amount ($5 million? $10 million? How much does someone deserve for a year’s work?) or to a multiple of the lowest paid employee’s salary. Either way, preclude self-dealing by capping the rewards.
But don’t expect this to be seriously considered any time soon, of course.