When the balance between CEO talk and CEO compensation is off kilter, company value lags.
- By
- February 25, 2015
- CBR - Accounting
When the balance between CEO talk and CEO compensation is off kilter, company value lags.
How can you tell how much a CEO knows relative to subordinates? Measure how much the CEO speaks.
Chicago Booth’s Michael Minnis, working with Feng Li and Venky Nagar of the University of Michigan and Madhav Rajan of Stanford University, combed through thousands of earnings-call transcripts to identify who was speaking. Among the findings:
At big companies that have intensive R&D operations (think pharmaceutical firms), the CEO is more likely to delegate speaking on the call to someone else, perhaps an executive who knows more about the company’s research or products.
CEOs with advanced degrees speak more often on calls. That is “either because they know more, inherently, or because they are good at absorbing knowledge and can just pick it up,” Minnis says.
The more a CEO speaks, the more she gets paid relative to her subordinates.
CEOs who talk a lot and get paid a lot, and CEOs who talk little and get paid less, preside over the companies with the highest value, measured by a ratio known as Tobin’s Q (market value to book value). It’s when the balance between CEO talk and CEO compensation is off kilter that company value lags.
“When there’s a proper match between CEO compensation and CEO talking, firm value is highest, on average,” Minnis says. “What’s interesting is that there is not necessarily a straightforward answer to how much the CEO should get paid and how much the CEO should know relative to the management team; it’s the combination of factors that’s important,” he adds. The CEO does not have to be the most knowledgeable person in the organization as long as other executives have the requisite knowledge—and the CEO is paying them commensurately.
If the CEO has a financial background, the CFO is heard less often on investor calls.
“The way a firm approaches external communications can reveal something about how the firm internally operates,” Minnis says. This may be most illuminating for outsiders, including shareholders, who often have less access than board members and employees to what’s going on within the firm.
Feng Li, Michael Minnis, Venky Nagar, and Madhav V. Rajan, “Knowledge, Compensation, and Firm Value: An Empirical Analysis of Firm Communication,” Journal of Accounting and Economics, August 2014.
While Sarbanes-Oxley improved financial reporting, there’s still room to increase disclosure regulation.
Make It Harder (but Not That Hard) for Companies to Lie about EarningsAn auditor’s track record of accepting high-misconduct stockbroker clients, which tends to predict their new clients’ future misconduct, is closely tied to the reputation of the auditor.
To Find an Honest Stockbroker, Check Out the AuditorCompensation regulations for bankers' in the UK and EU have helped curb risk, but they've come with some unintended consequences.
Does Limiting Bankers’ Pay Work?Your Privacy
We want to demonstrate our commitment to your privacy. Please review Chicago Booth's privacy notice, which provides information explaining how and why we collect particular information when you visit our website.