Study: Tech CEO Pay Doesn’t Match Performance

An analysis of the 100 largest technology companies finds that those with the highest-paid CEOs in 2005 had the worst returns.

In the recent study, DolmatConnell & Partners, an executive compensation consulting firm based in Waltham, Mass., found there was an inverse correlation between tech CEO pay and shareholder returns over a one-year period. Companies analyzed in the study included Cisco Systems, Dell, EMC, Google, Hewlett-Packard, IBM, Microsoft and Oracle, as well as telecommunications providers, technology services companies and products distributors.

The one-third highest performing companies paid their chief executives an average of $7.12 million–while the bottom third paid their CEOs $9.29 million. The study compared direct compensation, which includes base salary, bonus, long-term incentive payouts and value of stock grants.

Why the disconnect?

Jack Dolmat-Connell, founder and president of the firm, cites the phenomenon of “chasing the median”: Companies benchmark their executive compensation figures on peers instead of looking at factors related to performance.

He also suggests that lower-performing companies may be investing in leadership talent to get things on the right track: “They may be paying significantly over-market to get those good CEOs.”

Dolmat-Connell declines to cite specific examples of highly paid CEOs whose companies underperformed. “We don’t know exactly the reason why a company does things,” says Dolmat-Connell. “A company may be in the midst of a major business transition–we don’t know the intricacies of the situation to know whether [a compensation package] was right or wrong.”

But IBM, as an example, corroborates the study’s findings. According to Baseline‘s analysis of the 100 tech companies in the DolmatConnell study, IBM is in the bottom third, as its stock price declined 15% in 2005. Meanwhile, CEO Sam Palmisano is one of the highest-paid executives in the industry, with direct compensation last year totaling $12.4 million–including a $5.2 million bonus–according to regulatory filings. In IBM’s 2005 proxy statement, the company’s compensation committee says it “believes that the total value of Mr. Palmisano’s compensation is appropriate compared to chairmen/CEOs of the company’s large, complex global competitors.” It also notes that his 2005 compensation included a $4.2 million payout from IBM’s 2003-2005 long-term incentive program, “based on the company’s cumulative financial results over that three-year period.”

Then, on the other hand, there’s Bruce Chizen, CEO of Adobe Systems. Adobe was included as part of the DolmatConnell study and ranks in the top third (its stock was up 20% last year). Chizen received $1.9 million in direct compensation in 2005, below the industry average.

Despite the overall inverse correlation of pay to performance in the tech sector, Dolmat-Connell notes that year-over-year, in CEO compensation of the highest-performing group of tech companies increased in 2005–up 15.7% versus the year prior–while that of the chief execs of the bottom-performing companies declined 12.0%.

“The starting points are wrong,” he says, “but things are moving in the right direction.”

A copy of the study can be accessed here: