New academic research takes a step in this direction. Bang Dang Nguyen of the University of Cambridge’s Judge Business School and Kasper Meisner Nielsen of the Hong Kong University of Science and Technology have come up with a proxy for the perceived contribution a specific executive makes: the market reaction to his or her sudden death.
The idea is simple. If an executive dies without warning and the stock price of the company rises relative to peers, shareholders are attributing a negative value to that executive. This happened in 42 per cent of the cases the academics investigated, suggesting about two in five executives are overpaid.
Moreover, they compared this perceived value with the 'abnormal' pay of the executive in question - the amount by which his or her pay differed from what one might expect on the basis of the year, company size and industry. Encouragingly, this produced a positive correlation, suggesting that higher pay is indeed associated with a higher contribution. Indeed, the professors calculated that the average executive takes home 71 per cent of the value they personally create. That’s a fair chunk, but it does leave some left over for shareholders.
Before investors heave a sigh of relief, however, I should point out the limitations of this research. First, the fact that sudden deaths are mercifully unusual poses a big problem. The professors analysed all executive deaths at US listed companies between 1991 and 2008. But after excluding those instances where a death was expected or where other news muddied the waters - the planned merger of Danielson and Midland Financial in 1996 was cancelled when both chief executives were killed in the same plane crash, for example - they only came up with 149 data points.
Dr Nguyen defends the limited data set on the grounds of purity. He says it took a research assistant a year and a half to whittle the initial data down to 149 genuine instances of sudden death. That’s all well and good, but it’s something of a stretch to assume that such a small sample is somehow globally representative.
A second problem is that the professors use stock movements over a three-day period as their guide to investor perceptions. This is hugely simplistic. The movements are likely to be prompted by day traders rather than long-term investors. And they may reflect investors’ dislike of uncertainty rather than their fondness for the deceased boss.
Clearly, this research won’t be the last word on executive pay. The attempt to answer the question of executive performance empirically is nonetheless interesting. Other academic attempts to compare executive pay and performance have used complex models driven by assumptions that, one suspects, can be all too easily tweaked to fit the politics of the researchers - or the interests of those that fund them.
Alternatively, chief executives sometimes defend their pay cheques simply by pointing to share-price performance (if it’s been good). This was the tactic adopted by Andy Harrison, the former boss of easyJet (EZJ), when he came under fire from founder Sir Stelios Haji-Ioannou, for example. It has the virtue of being empirical, but we all know that share prices are influenced by more than simply who is at the top of the corporate hierarchy. The boss may have been supported by a strong team, the demise of a rival, an economic boom or easy monetary policy.
In any case, some of the heat may now be coming out of the debate over executive pay. That’s because total remuneration awarded to FTSE 100 chief executives has been falling: down 7 per cent last year after a 5 per cent decline in 2012, according to research by consultants Manifest and MM&K.
Business secretary Vince Cable would like to attribute that to anticipation of the government’s 'say on pay' rules introduced this year, which give shareholders a binding, forward-looking vote on executive packages. No package has yet been voted down, but the threat has forced remuneration committees to engage more closely with big shareholders. If this is the start of a longer-term trend, and executive pay starts looking less egregious, the question of how to measure executive performance may finally lose some of its potency.
