Underperforming CEOs getting paid too much


As the amount earned by the CEOs of U.S. technology companies continues to rise above the rate of inflation, new figures reveal that poorly-performing tech firms are continuing to pay their bosses too much.

A study by pay consultants DolmatConnell & Partners of trends in the Tech100 has found that CEO total remuneration increased once again in 2005, rising by almost nine per cent.

Total remuneration, including basic salary, options and bonuses, rose to an average of $8.4 million, but varied significantly by firm performance.

When looked at relative to company performance, CEO pay shows a promising trend. Pay in the highest performing third of the companies increased by nearly 16 per cent, pay in the middle third increased by 13 per cent and pay in the lowest third fell by 12 per cent.

But the study also highlighted an inverse relationship between CEO remuneration and performance.

"Overall, the major finding of the study illustrates that year-over-year changes for long-term incentive and total direct compensation seem well connected to performance," said Jack Dolmat-Connell, President of compensation consultancy DolmatConnell & Partners.

"This is very good news because it means that Board's are moving CEO pay in the right direction. However, many companies are still off the mark in relation to paying for performance because the starting point of CEO pay is wrong. Lower performing firms are still paying CEOs far too much."

However long-term incentive compensation changes were better linked to performance, rising 21 per cent for high performers and falling by 30 per cent for low performers.

However, bonuses barely declined at low performing firms, falling only a little over two per cent, and increased at high performers only by nine per cent

These results indicate that bonus plans do not have significant downside to overall performance, the study argues.

For the second year in a row, the DC&P study found a dramatic increase in the use of restricted stock - now being used by almost half of the Tech100.

Meanwhile, contrary to many reports, it also found that nearly all technology firms continue to use stock options despite mandated stock option expensing. What has changed is that a majority of technology firms now provide a portfolio of at least two long-term incentive awards (stock options, restricted stock, and performance-based plans) as firms realize the benefits of having part of LTI compensation de-leveraged from stock price (as options are tied directly to stock price).

"The majority of technology firms today are providing part of CEO long-term incentive compensation in restricted shares or a performance-based LTI plan, in addition to still providing stock options," Dolmat-Connell added.

"Restricted shares offer significant retention value for CEOs, while performance-based plans provide a strong link to company operational goals. Stock options are still king when it comes to technology firm compensation, but revised accounting rules have levelled the playing field, giving firms options beyond stock options."