The Bank of Israel..
(photo credit: Ariel Jerozolimksi)
Executive salaries of CEOs working at publicly-traded companies have not been
linked to company performance in the last five years, according to a study
published by the Bank of Israel on Tuesday.
“The main finding of the
study is that a CEO’s salary is positively correlated with the size of the
company and its performance (both accountingwise and on the stock
At the same time, it appears that the sensitivity of CEO
salaries to performance has been declining over time to the point where, during
the last five years, CEO salaries could not be explained by company
performance,” states the central bank report. “The size of the company is the
main factor explaining CEO salaries.”
Making use of the largest sample
gathered so far of personal and salary information on CEOs in publicly-traded
companies, the study – carried out by Meital Graham from the Research Division
of the Bank of Israel – attempts to determine which factors have influenced the
salaries of CEOs in companies that are traded on the Tel Aviv Stock Exchange
during the last 15 years, .
The study found that the link between CEO
salaries and company performance has weakened over the past five years. The
strongest link existed during the years 2000 to 2003, which were recession
years. In contrast, during the years 2004 to 2009 no correlation was found
between a company’s performance and the salary of its CEO.
salary of a CEO grew in real terms by 104 percent from 1995 to 2009, to a level
of NIS 2.5 million.
As expected, it was found that the companies that
paid the highest salaries to their CEOs were the banks, the insurance companies
and financial service companies. It was also found that CEOs receive higher
salaries in larger companies.
In terms of salary structure, the study
showed that a CEO is compensated for the relative performance of his company in
the short-term of up to two years and not for its long-term
During years in which the market return is positive, a CEO
will be compensated beyond what is called for on the basis of the company’s
performance, and when the market return is negative his salary will
“If the company reports profits that are low relative to other
companies in the industry, the salary will decrease and vice versa,” stated the
“With respect to differences in the effect of various factors on
CEO salaries over the course of the business cycle, it was found that the
elasticity with respect to performance was in fact higher during a
Similarly the study found that the decline in a CEO’s salary
in reaction to a drop in the value of the company’s shares is larger than the
increase in his salary in reaction to a rise in the value of its
The study also investigated the connection between the
replacement of a CEO and the company’s performance. It was found that the poor
performance of a company (accounting- wise) increases the probability of the CEO
“In contrast, stock market performance operates in the
opposite direction,” stated the report. “A CEO will prefer to leave a company at
its ‘peak,’ in order for him to present enhanced personal achievements at his
Furthermore, the study showed that the seniority of the
CEO at the company has a positive influence on his salary but its contribution
declines over time, while other characteristics were found not to influence the
size of his salary.
The study is the first to investigate the incidence
of co- CEOs and found gaps in salaries between two CEOs in the same company
during the same period. These were dependent on the differences in the CEOs’
holdings, seniority, level of education and function on the Board of
Thus, a co-CEO with greater holdings will have a higher
salary, while the seniority of a co-CEO will contribute to a higher
In addition, a co-CEO with an academic degree will in fact have a
lower salary than a CEO with only a high school education – a finding explained
by the negative correlation between the level of formal education and the CEO’s
percentage holding in the company – and a co-CEO who serves as a director on the
board of directors or as the chairman of the board earns more than a co- CEO who
only serves as a CEO.