The myth of pay for performance

Executive pay has nothing to do with shareholder returns in Australia’s top companies. So when will industry funds do something about it?

Over the past 15 years, Commonwealth Bank shares have gone from $16 each to $74, an increase of $58, while NAB shares have gone up by $12, from $19 to $31. In that time, CBA has paid $35.19 in dividends and NAB has paid $22.29.
That works out to be additional wealth of about $93 per share to CBA owners and $34 to NAB, or 13.7 per cent compound return per annum for CBA and 7.2 per cent for NAB. Big difference. (By the way, the compound annual return of the all ordinaries accumulation index, including dividends, has been 8.75 per cent per annum – CBA has killed it, NAB has done worse).
Over that same period, NAB has paid its succession of chief executives $108 million and CBA paid its CEOs $98 million.
In other words, the pay of the CEO made no difference to shareholder returns; in fact the bigger payer between those two banks performed the worst.
A few months ago, investment bank CLSA plotted the executive pay of Australia’s top 200 companies against total shareholder return. Here’s the rather amusing result:

Graph for The myth of pay for performance


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