Hillary Clinton is making bad corporate management a campaign issue, saying the CEOs of public companies are so focused on short-term results they undermine their companies’ long-term growth. In a speech Friday, she signaled that she’ll try to roll back a provision of the tax code which she referred to as “an effort in the 1990s to tie executive compensation to corporate performance, including through the use of stock options.
If she was being a bit delicate about the origins of that provision, there was a good reason: it was Bill Clinton’s policy….Unfortunately, the plan didn’t work as Bill Clinton hoped. Instead of keeping CEO pay under control, the new policy saw public companies pile on even more pay in the form of performance incentives like stock options and restricted stock. CEO compensation grew more than twice as fast in the 90s as it had during the 1980s….More importantly, when we look at the results the new policy was supposed to produce – faster earnings growth for public companies – it turns out that piling on performance pay did nothing to improve corporate performance. Corporate earnings per share of the S&P 500 actually grew more slowly on average in the 1980s, 1990s, and 2000s – when companies used lots of performance pay – than in the 1960s and 1970s, when companies paid executives mostly in salaries. Many factors influence corporate earnings, and in fact they’ve been growing much more quickly the past few years, but it would be hard to argue that performance pay improved earnings growth. The problem is not just that performance pay was sometimes poorly designed. Econometric studies that compare companies that use more performance pay to those that use less have repeatedly found that performance pay does not improve performance.