Here’s one way to tell if a company is overpaying its CEO – MarketWatch

VEA Vice Chair Nell Minow is quoted in this article about use of non-standard financial reporting to inflate CEO compensation:

U.S. companies that use nonstandard numbers to calculate executive compensation are overpaying their top managers, according to a new research report.

The working paper, “High Non-GAAP Earnings Predict Abnormally High CEO Pay,” by Nicholas Guest of Cornell University’s Samuel Curtis Johnson Graduate School of Management and S.P. Kothari and Robert Pozen at the Massachusetts Institute of Technology’s Sloan School of Management, finds that non-GAAP earnings, or those that do not conform with Generally Accepted Accounting Principles, exhibit a significantly positive relationship to CEO pay.The study is based on GAAP and non-GAAP earnings and compensation data for S&P 500 SPX, +0.46% companies from 2010 to 2015.

“We hypothesize that large, positive differences between non-GAAP and GAAP earnings are associated with excessive CEO compensation,” the researchers wrote. ”That is, the compensation committee of the board of directors behaves as if large, positive non-GAAP adjustments to GAAP earnings warrant high levels of compensation.”

Nell Minow, vice chairwoman at the corporate-governance advisory firm ValueEdge Advisors, said shareholders should be paying close attention to this trend.

“GAAP metrics are unreliable enough, so using non-GAAP metrics for compensation is really horrifying,” she said. “This is a classic case of shoot the arrow at the wall and draw a target around it.”

Source: Here’s one way to tell if a company is overpaying its CEO – MarketWatch

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