Last year, MSCI asked whether pay packages given to U.S. chief executive officers reflected long-term shareholder returns and found they did not.1 The bottom fifth of companies by equity incentive award outperformed the top fifth by nearly 39% on average on a 10-year cumulative basis.

That study looked at awarded pay — of which 60%-70% reflected incentive stock awards.  Awarded pay figures, which are based on the value of the company’s stock at grant date, lay out the range of potential CEO earnings, and is intended to align their interests with those of the company owners. We now extend that study to examine realized pay — how much compensation CEOs actually took home when they exercised their equity grants.

Does realized pay indicate any better alignment between CEO pay and long-term company performance? If anything, realized pay was even more out of whack than awarded pay. More than 61% of the companies we studied showed poor alignment relative to their peers.


·         More than three-fifths of 423 MSCI USA Index constituents had cumulative 10-year realized CEO pay totals that were poorly aligned with the company’s 10-year total shareholder return (TSR) performance, based on the 2006-2015 period.

·         Among the most poorly aligned companies, 23 underpaid their CEOs for superior stock performance and 18 overpaid for below-average stock returns, relative to their sector peers.

·         The 18 companies that overpaid for underperformance (just 4.3% of our sample) and accounted for nearly 10% of the total sample market cap, which could magnify the impact of their pay for performance misalignment on investors.

·         Short-term performance assessments, an over-reliance on share price-related performance measures, poor succession planning and SEC-mandated annual reporting standards were the main factors exacerbating this misalignment.

·         None of the companies in the poorly aligned group experienced consistent disapproval on CEO pay, suggesting that shareholders were more focused on payouts in individual years than over longer time horizons.

Long term, these findings suggest that the 40-year-old approach of using equity compensation to align the interests of CEOs with shareholders may be broken.

Read the full paper here