The Value of Pay-Versus-Performance Data

Today we interrupt our usual attention to corporate earnings data to call out another type of disclosure that institutional investors might also find useful: the pay versus performance data one can use to evaluate CEO compensation.

Companies have been making these disclosures since last year, and the information is readily available in Calcbench through our Disclosures & Footnotes Query page. Look for the “Related Documents” menu on the left side of the screen, open it, and you’ll see an option for “Pay Versus Performance” at the bottom. Click on that choice, and the compensation disclosures will appear for whatever company you’re researching. Figure 1, below, shows the pay disclosures for Walmart ($WMT). 

We had a detailed post on how to find pay-versus-performance disclosures last year, so we won’t rehash all that material now. Instead, we want to highlight some interesting research to show why “PvP” disclosures can be so useful to institutional investors.

Because, according to one analyst who eats and breathes these disclosures, you can tie the effects of CEO pay and stock ownership to future share prices. 

Said analyst is Stephen O’Byrne, who runs Shareholder Value Advisors and is a compensation data guru. O’Byrne has identified two measures of “incentive strength” that tend to drive future stock returns in a positive direction: relative pay risk and initial stock holdings. He also found a third metric, pay premium at peer group average performance, which tends to have a negative effect on future stock returns. O’Byrne mapped out how his analysis works in a recent post on the Harvard Law School Corporate Governance Forum.

O’Byrne’s analysis does have meat on its bones; we published a guest column from him last year comparing the pay packages of Pfizer CEO Albert Bourla and Verizon CEO Hans Vestberg, which concluded that Bourla’s compensation gave him a decidedly greater incentive than Vestberg to push his company’s share price upward — and shortly after we published that analysis, Vestberg was ousted as Verizon CEO. 

PvP data is at the heart of all those calculations. You’d still need to feed that data into some fairly sophisticated models, but information is there (or, more accurate, here in the Calcbench archives). 

Then investors can move beyond the historical use of CEO pay data — to complain that CEOs are overpaid — to do value-added, forward-looking analysis that will improve the value of your investments. That’s the name of the game no matter what the boss is paid.