New Year's Eve is a time to count the chickens: bonuses, dividends, and other rewards. Last year, the average CEO of the tech giant received annual bonuses of more than $50 million in stock options and cash. We are happy for them but will try to be objective. Do they deserve that?
What influences an executive to perform effectively the most: salary, bonuses, or stocks? Some studies can explain this.
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Salary matters for individuals who do their part and cannot affect the overall return, so it’s a good motivation for the middle manager to grow.
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Bonuses are effective when there is neither manipulation of KPIs nor focus on short-term gains.
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Stocks are significant because shareholder returns are generally higher in companies led by their owners.
But how do tech company executives relate to market capitalization if there is still doubt that AI is a bubble? We looked at the top 20 global tech companies by market capitalization and found a relatively strong correlation with revenue (0.63). Okay. Executives might influence stock behavior through revenue. Then how do they affect revenue? What are the key factors of a successful executive?
We hypothesize that the executive must invest in something (education, career, others) to get the reward. Using regression, we analyzed four parameters of 222 executives to see the links with the company’s performance:
- QS ranking of the university they graduated;
- Education (BA, Master, MBA, PhD);
- Years of experience, based on age;
- Board cultural diversity/identity, assuming that it may have a different impact on business.
Market capitalization. The university rank stands as the most consistent contributor – firms with higher QS scores tend to have higher market values. The education level also shows a positive relation, suggesting that boards with more postgraduate and doctoral training are observed in higher-valued firms. Board locality implies that more domestically concentrated boards are associated with lower capitalization. Board experience has a small positive coefficient.
Revenue. The same predictors provide little explanatory signal. Differences in annual sales across this cohort are not aligned with university pedigree, education depth, age, or locality.
To conclude:
Salary. We didn’t analyze it, as it’s an ex ante reward that's hard to deserve. It serves more like an executive’s market indicator and insurance, as well as an incentive for the middle managers to climb the career ladder.
Bonuses. Here, we doubt they deserve bonuses as a % of sales. The latter is more likely to be driven by the market, business model, the company’s structure, and scale.
Stocks. Those who studied long and hard in good, expensive universities and work in international boards may affect market capitalization. They deserve stocks.
So, executives do deserve their rewards, but only some.
