Does CEO compensation reward low performance over optimism?

Hospital CEO pay may penalize optimistic behavior and reward lower-performing executives, according to new research.

Based on U.S. CEO compensation data, those CEOs whose earning projections and option exercise behavior were more optimistic got fewer bonuses, smaller stock option grants and less overall compensation than other chief executives, according to a study published in the Journal of Financial Economics.

"These findings add to our understanding of the interplay between managerial biases and remuneration and show how sophisticated principals can take advantage of optimistic agents by appropriately adjusting their compensation contracts," states author Clemens A. Otto, an assistant professor of finance at HEC Paris.

Moreover, CEO compensation may reward the worst performers, according to a 2013 study. Researchers analyzed 1,500 major companies and compared CEO pay to company performance over several three-year periods. Based on their analysis, "the more CEOs are paid, the worse the firm does over the next three years, as far as stock performance and even accounting performance," co-author Michael Cooper of the University of Utah's David Eccles School of Business told Forbes.

Indeed, among the 5 percent of highest-paid CEOs, their companies did 15 percent worse than others on average, according to the study. Cooper told Forbes this is because the highest-paid CEOs tend to over-invest based on the confidence such pay creates, which leads to negative returns for investors. Of the 150 lowest-performing CEOs, researchers said, 13 percent facilitated mergers in the past year, with the average return from those mergers coming to negative 0.51 percent.

Two of the 50 highest-paid CEOs are within the healthcare industry, according to May research conducted by the Associated Press and Equilar. But despite the mounting backlash against high CEO compensation, defenders say hospital executives receive higher and higher compensation not because of greed, but because of a robust stock market, FierceHealthcare previously reported.

To learn more:
- here's the first study abstract
- here's the second study
- read the Forbes article

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