As corporate boards pay CEOs similarly, company performance could take a hit, report finds

Executive pay is beginning to look the same everywhere as corporate boards pay CEOs similarly, and that could affect company performance, according to a recent study from a Virginia Tech researcher. 

CEO compensation has become 24% more similar at public firms since 2006, based on an analysis of how companies structure pay, including salary, bonuses, stock awards and other incentives.

“Boards face pressure to conform,” study author Felipe Cabezón, an assistant professor of finance at Virginia Tech’s Pamplin College of Business, said in a statement. “But in doing so, they risk sacrificing flexibility and lowering shareholder value.”

Cabezón analyzed data from more than 2,700 public companies between 2006 and 2019 to understand whether boards design compensation packages to drive performance or avoid criticism.

Overall, the researcher found companies follow similar models regardless of size, strategy or sector. The trend appeared to dilute a connection between pay and performance, primarily driven by investor demands and disclosure rules, the researcher found.

Boards have increasingly benchmarked against peers as companies release more detailed pay data, the researcher found.

“Transparency promotes accountability,” Cabezón said. “But it can also encourage mimicry.”

Standardization is linked to lower firm performance, the researcher found. Companies with more conventional pay structures had weaker alignment with executive incentives, business outcomes and pay-performance sensitivity.

PayPal, in particular, has paid out major packages for talent after hiring new executives. The company said executive compensation was based on compensation levels at peers, the report found.

In addition, Cigna said executive compensation would be tied to customer satisfaction. Executive compensation is also affected by financial performance, the company said.