CEO retirements can hurt stock prices -- study
Thu, Oct 22 11:23 AM IST

By Jonathan Stempel

NEW YORK, Oct 21 (Reuters) - Companies that bestow lavish pay on chief executive officers who perform well in their final years can see their shares suffer after those executives ride off into the sunset, a new study shows.

The study by Prof. Paul Kalyta of McGill University in Montreal shows that, for Fortune 1000 companies in the 1997-2006 period, stock prices lagged those of peers by 8.3 percent over three years following the retirements of CEOs who had big incentives to do well in their last years.

Kalyta said the companies used an obscure but popular program, a supplemental executive retirement plan (SERP), that gives CEOs nearing retirement an impetus to goose earnings, perhaps by pushing revenue forward while delaying expenses.

"It doesn't make any economic sense that a CEO should receive retirement benefits based on one or two years of good performance," Kalyta said in an interview. "It should definitely be tied to long-term performance, perhaps over 15 to 20 years, so that CEOs don't have an incentive to manipulate earnings in the short term."

The study covered 388 CEOs, of whom about 70 percent had SERPs and 44 percent had SERPs contingent on performance during the period determining the size of the CEOs' pensions.

Excessive CEO pay has been under heavy attack by lawmakers investors and governance critics, especially at banks and other financial companies whose risk-taking was a root cause of the recent financial crisis.

The Obama administration pay czar Kenneth Feinberg is expected by Oct. 30 to order companies that received extraordinary government aid to slash pay for top executives.

Voluntary CEO retirements are often orderly, especially when the market knows groundwork for change has been laid. Kalyta wrote that, as a general matter, such retirements on average have little impact on long-term stock prices.

Yet he found a positive correlation between the size of CEO SERPs and the degree to which stocks of companies that have them lag the market after the CEOs step down.

"The manager has strong incentives to make accounting choices that increase firm short-term income and, therefore, amplify the value of his/her pension," Kalyta said. "To use it for essentially selfish reasons, even when legal, certainly raises ethical questions, particularly when (it) destroys a considerable amount of shareholder value."

Kalyta wrote that investors often do not "unravel earnings management" until after CEOs depart, leaving the shares of companies with big CEO SERPs "temporarily overpriced."

The professor's study is published in the current issue of The Accounting Review, a publication of the American Accounting Association.

(Reporting by Jonathan Stempel; editing by Andre Grenon)

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