The two studies cited in The Wall Street Journal remind directors that they should be both independent and “businesslike” when it comes to evaluating management. Two new studies challenge the notion that companies that pay top price get top talent. Lucian Bebchuk’s Harvard study pointed out that the bigger the “CEO pay slice,” the lower the company’s future profitability and market valuation. Adding fuel to the fire is the study by finance professor Raghavendra Rau of Purdue who looked at CEO pay and stock returns for roughly 1,500 companies. The conclusion of his study: that 10 percent of firms with the highest-paid CEOs produce stock returns that trail their industry peers by more 12 percentage points, cumulatively, over the next five years.
Clearly, one issue for shareholders during the 2010 proxy season is how the board provided oversight for CEO compensation. In 1951, legendary investor Benjamin Graham suggested that directors submit to an interrogation in order to justify “the generous treatment” they are asking shareholders to approve. “The stockholders are entittled to be told… just what are the excellent results for which theyse arrangements constitute a rewarded and by what analogies or other reasoning the board determined the amounts accorded are appropriate.”
Surely such questions are valid 59 years later.