Data Analysis Reveals Inflated Pay
Why do companies disclose “Non-GAAP” or “Proforma” earnings and performance measures? Is it because accounting standards don’t provide a suitable way to measure and understand corporate business models? Is it because Non-GAAP measures better reflect economic reality, or, at least, the factors under the control of management? Perhaps not.
Recent research from Nicholas Guest of Cornell University, and S.P. Kothari and Robert Pozen, both of the MIT Sloan School of Management, dives into the data.
Their paper looks at the link between high non-GAAP earnings and abnormally high CEO pay. The research found that firms which report higher non-GAAP earnings than GAAP earnings, on average, pay their CEO upwards of USD2M more per annum, and that “These firms pay their CEO excessively despite (i) weak contemporaneous and future operating performance and (ii) lower contemporaneous stock returns relative to other firms in the S&P 500”†.
A must-read article for policy makers, standards setters and securities regulators? A call to action for evidence-based policy making, drawing on high quality structured data? It would seem so. Coincidentally, one of the authors, Dr S.P. Kothari, has just been appointed to head the SEC’s Division of Economic and Risk Analysis (DERA), which looks after that regulator’s steadily expanding structured data program.
Read more here.