Monday, February 20, 2006

Bad Headlines Do Not Impact CEO Pay, Then What?


David Larcker, Professor of Accounting at Stanford Graduate School of Business, joined with two other professors from The Wharton School to assess whether negative media coverage on CEO compensation resulted in reduced executive pay. Seems to me that the answer had to be a resounding "yes." I would never want to be embarrassed like that before the people I work with every day. Every time I pick up Sunday's New York Times Business section to find Gretchen Morgenson skewering another company for exorbitant CEO pay, I imagine some red-faced CEO skulking into work the next day.

Astonishingly, Larcker found that negative press attention about CEO salary had little or no effect on how much chief executives get paid. The authors examined 15,000 press articles on CEO compensation between 1994 to 2002 and found little change in how much companies paid their chieftains despite harsh criticism from journalists. Larcker found that negative press pay outings serves two different needs, unrelated to lowering CEO compensation. First, people want to be entertained and journalists are doing a good job making us laugh with those headlines on $6,000 shower curtains and free seats to Red Sox games. Second, Larcker and fellow researchers think that negative media coverage on executive compensation actually makes us look more closely at the board and wonder how well they are handling their fiduciary responsibility to shareholders. I guess that the attention on CEO pay fades in comparison to the pressure that gets placed on the board's behavior for awarding that much money to one person in the first place.

I know David from Wharton and am glad he is pursuing the media and CEO angle. More and better information on the intersection between corporate behavior and the media is a bonus and I look forward to further insights from the team. Although this is just a working paper, Larcker states "For example, we are also analyzing interviews and other communication in an effort to detect lying by corporate officers. Such research promises to provide new insights in predicting accounting restatements, fraud and stock price performance."

Are CEO lie detectors next?

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