Executive compensation is one of those lightning rod issues that seems to flare up during downturns in the economy and then fall back to the wayside during times of prosperity.

The subject jumped back onto the radar recently when shareholders at Chubb (ticker CB) recently disapproved of their CEO's pay package which was set to compensate him in the following manner:

  • $23 million in tax reimbursement
  • $24 million in cash
  • $33 million in equity

Details of this substantial deal were reported in an article by Laura Lorenzetti at Fortune entitled "Why This CEO is Missing Out on an $80 Million Payday." The reporter pointed out that the entire compensation listed above would be due to the Chubb CEO even if he left by his own choosing.

Shareholders apparently didn't feel this outlandish sum fit with the Chubb corporate slogan "Never Compromise Integrity."

Obviously, the Chubb situation is only a drop in the bucket with regards to the royal compensation packages being routinely awarded to the chiefs of publicly-traded companies in the United States and abroad.

Motivated by this story, the tastytrade research team decided to take up the subject of executive salaries on a recent episode of Market Measures to study the relationship between stock performance and CEO compensation.

The findings were nearly as eye-popping as the outrageous salaries themselves.

First, the team found that the average CEO compensation for publicly-held companies was $13 million in 2014.

Some of the top paying companies are shown in the slide below:

Seeking to put context around the numbers, the Market Measures team then examined the top 100 publicly traded companies in terms of total CEO compensation and compared that information to the performance of the underlying stocks in 2014.

Looking at the top-100 paid CEOs, many of them seem to have managed companies with stocks that performed poorly over the last 12 months. The chart below illustrates this quite clearly, with Discovery Communications (ticker DISCA) looking like an extreme case:


The Market Measures co-hosts Tom Sosnoff and Tony Battista then hypothesized that the top performing stocks over the last year would accordingly have the highest compensation.

In graphical terms, the "perfect" graphical representation of this relationship should equate to rising pay for rising stock performance.

However, when they compared the actual pay to the actual performance of the stocks, the resulting chart revealed an irrational and chaotic relationship between CEO pay and the relative performance of their stocks.

The plot of this data is illustrated below:

The above illustrates that there is no discernible relationship between stock performance and CEO compensation.

Based on this information, one has to wonder if Chubb shareholders aren't the only ones that should be reviewing the salary information of top executives in companies which they invest.

We encourage you to watch the full episode of Market Measures covering executive compensation and underlying stock performance when your schedule allows.

Please don't hesitate to follow up with any comments or questions at support@tastytrade.com.

We look forward to hearing from you!

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.