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Highest Paid = Highest Performance? A Look at Business Week's Top 20

Business Week's most highly compensated executives include some of the most closely monitored individuals at some of the most celebrated organizations. It is almost a mathematical certainty that in order to make Business Week's Top 20 Compensation list, the stock had to rise precipitously over the prior period. In some situations, the high compensation represented one terrific year for the company, whereas in other situations the high compensation represented an executive selling a lifetime's accumulation of stock options. Either way it is interesting to assess how the stock performed in the periods after the executive harvested his options.23 The data generally show that the more highly compensated CEOs had more revenue growth with their companies and considerably higher M&A activity (up to 4 times greater) compared to similar companies in the same industry! Moreover, the stock of highly compensated CEOs generally performed worse than the S&P 500 (benchmark index) in the periods after the CEO harvested his stock options. Furthermore, the evidence suggests that on average, if a highly paid executive is in office for more than 10 years (i.e., well-entrenched executive), the executives are more likely to under-perform the industry benchmark after cashing out of stock options. The exceptions to this rule were Jack Welch at General Electric and company founders (e.g., Andy Grove at Intel, Bill Gates at Microsoft, Larry Ellison at Oracle, and Michael Dell at Dell Computers) that continued to outperform the market.24 Consequently, in the years before the executives cashed out of their stock options, their companies had more M&A activity (on average); in the years after they cashed out, their company stocks (on average) performed poorly. Clearly, future models of growth would benefit by examining potential long-term growth and compensation developments.

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