U.S. Companies that pay their CEOs huge compensation and bonuses packages risk more frequent credit downgrades and higher bond-default rates than those that do not, according to a Moody's Investors Service report.
The report, the first empirical examination of a link between excessive compensation and credit risk, also found that the base salary of CEOs could not predict credit risk alone. The key factor appeared to be paying larger-than-expected bonuses or stock options.
According to Market Watch:
Market Watch | Moody's finds link between high pay and credit risk
Compensation that is out of line may indicate that board oversight is lax and, as a result, management may face insufficient pressure to deliver good financial performance, for example, Moody's speculated. On the other end of the spectrum, pay closely tied to compensation might be driving executives to indulge in high-risk behavior - or worse. Compensation that is highly sensitive to short-term financial performance may create incentives for CEOs to manipulate short-term measures, the firm said.