New study finds CEOs are rewarded for wrong kind of growth

Friday, 7 January 2011 00:01 - - {{hitsCtrl.values.hits}}

Washington (ANI): A new study from University of Toronto has found that many CEOs are being rewarded for company growth resulting from investments instead of improved profitability.

Partha Mohanram said that this trend could send a message to all managers that growth is important at all costs while hurting chances for companies to further improve shareholder value.

“We’re not alleging these guys are doing this on purpose -- far from it. We just think this is a fallacy many people fall for,” said Mohanram.

Mohanram and her team conducted the study using sample data of CEO compensation data on Execucomp, which tracks executive compensation among the S and P 1500 listed firms.

The researchers found that those who grew through increased investment actually got greater rewards than those who improved their companies’ profitability.

Companies with more value-oriented institutional investors showed a stronger link between improved compensation and profitability-related growth and a negative link between compensation and investment-driven growth.

“It’s good to grow,” says Prof. Mohanram, “but you have to grow in a way that adds value for shareholders.”