'CEOs worth their huge pay packets'

'CEOs worth their huge pay packets'

The international study, led by Massey University, has found that even in cases where CEOs are removed from their positions, they are nevertheless likely to move on to bigger and better paid jobs.

Researchers have claimed that CEOs leaving jobs shows if the company has been performing better than its competitors then the market reacts more negatively to news of the chief's departure in anticipation of shareholder wealth loss.

Dr Candie Chang, who led the study, has said that a good chief executive officers are their high salaries, bonuses and stock options, despite the somewhat jaundiced public view of high profile excesses revealed during company collapses of recent years.

For the study, the researchers analysed 298 chief executive departures in the United States in the decade from 1992.

The findings suggest that the stock market associates better prior performance and higher pay with a more capable chief executive. Not only that, but the higher the pay of the departing CEO compared to other executives in the company, the more negative the stock price reaction.

"The recent financial crisis and the storm over the pay of executives in financial firms have brought the questions of whether chief executives meaningfully add value to the companies they manage, and whether their pay reflects ability or power, into sharp focus.

"Collectively, our results provide strong support for the notion that firm value and performance are not simply outcomes of the firm’s core competency, product markets, or luck. Chief executive talent matters and is rewarded internally and recognised by external markets," Dr Chang said.

The researchers also studied where chief executives end up when they leave their companies and found two extremes. The first was that many don't have management positions within three years but at the other end, several move up to bigger firms or better paying jobs.

"We find that CEOs are more likely to 'move up' when the market reacts more negatively to their departure. The results suggest that the managerial labour market associates higher pay and better prior performance with higher chief executive ability and rewards them accordingly," Chang said.

Firms that lost a highly paid chief executive suffered a slump in performance after the departure if the prior performance had been good and the stock market reacted negatively to the departure, according to the findings.

The study is to be published in an upcoming edition of the 'Management Science' journal.

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