LINTHICUM, MD - An analysis of CEO salaries in bull and bear markets shows that the most effective checks on profligate executives are a major shareholder's takeover threat, a looming bankruptcy, or a relatively small Board of Directors whose members own company stock, according to a study in a journal of the Institute for Operations Research and the Management Sciences.
"Despite media scrutiny and a shaky economy, CEO salaries and compensation are not declining," says Praveen Kumar of the University of Houston's Bauer College of Business. "Our model shows what stops big raises: There is a threshold level of poor performance, and CEO's equity compensation is only restricted when performance falls below that level.
"The threat of imminent bankruptcy focuses the attention of every corporation. The fact that a company's books will be thrown open to creditors and the public is sobering. Just look at the energy sector, which is witnessing rough times. Recent figures shows that while 23 CEOs here in Houston had a compensation exceeding $10 million in 1999-2000, only 13 CEOs have compensation exceeding $10 million in 2000-2001."
The study, "Corporate Governance, Takeovers, and Top-Management Compensation: Theory and Evidence" is by Prof. Kumar; Sok-Hyon Kang, of George Washington University; and the late Richard M. Cyert of Carnegie Mellon University. It appears in the journal Management Science, an INFORMS publication. A summary of the study can be found online at http://www.informs.org/Press/CEO_abstract.pdf
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