Findings
Based on our analysis, we cannot conclude that there is any significant correlation between change in CEO pay and excess returns. We also found that companies with the greatest increase in CEO pay earned only median levels of excess returns.
Background and Methodology
The hypothesis underlying this study is that correlation between pay and performance does not exist. The rationale for undertaking this analysis was to seek statistical validation so that shareholders can seek changes from boards concerning their compensation practices.
There are 65 companies in the data set. These companies were selected on the basis of longevity to 1) eliminate survivorship bias and 2) have sufficient historical data for the purpose of valuing options. The small market in Canada precluded a larger sample.
We compared change in inflation-adjusted CEO pay over three consecutive one year periods starting in 2001 to excess total stock returns, adjusted for industry, over three consecutive one year periods which lagged CEO pay by one year. We lagged excess returns by one year to account for the backward-looking element in CEO pay.
Executive Compensation Study
Prepared by the Ontario Teachers' Pension Plan and Rotman School of Management.
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