It's almost become an American pastime to criticize excessively compensated CEOs, especially when the corporations involved aren't performing well. According to a new research study, there's a reason aside from basic fairness to be concerned about this. As it turns out, there's a direct correlation between cutting a CEO's pay and the resulting performance of his company's stock.
A team of researchers looked at 927 instances between 1994 and 2005 in which a CEO's pay was cut by at least 25 percent. In the year in which the CEO's pay was lowered, the median stock return for the companies involved was a loss of 8 percent. But in the year after the pay cut, the median stock in the study increased by 10 percent.
Cutting a CEO's pay is more common than generally believed, and is much more common than simply firing the CEO. The same study found that the boss was twice as likely to have his or her pay cut drastically than to simply be replaced.
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