The GIGO principle is at work in an SCMP article on a BDO "study" today.

BDO's meaningless study
5 August 2013

In the Suspended China Morning Post this morning, page B2, there is an article by Enoch Yiu on a "study" by accounting firm BDO Ltd, comparing directors' pay with performance, by calculating the ratio of board pay (for all directors in the company) to earnings per share (EPS), for each company in the 50-member Hang Seng Index.

Financially literate readers (apparently excluding the journalist and the accountant involved) will spot the obvious problem with this study. If your company's ratio is "too high", making your directors look expensive, then just consolidate your shares 10 for 1. That will increase your EPS by a factor of 10, and hey presto, the directors' pay per cent of EPS drops down the league table without altering the pay at all. In other words, the statistic is completely meaningless as a measure of pay-for-performance.

"Topping the list" as the "most expensive" board in this study was Want Want China Holdings Ltd (0151), which has a share price of $10.50 last Friday. But if it consolidated its shares 10 for 1, raising its price to $105, then it would only rank 14th on the list, still a meaningless ranking. What SCMP calls "the second-best outcome for shareholders" was China Mobile Ltd (0941), which closed on Friday at $83.15. If they had a 10 for 1 stock split, reducing the price to $8.315, then its board's pay per cent of EPS would climb 10-fold, dropping it from 2nd to 33rd on the list, again, meaningless. There would be no change in market capitalisation or value of individual shareholdings, but the rankings would be completely different.

Students of computing will be familiar with the GIGO principle in this study: Garbage In, Garbage Out. Some accounting firms will do anything for a bit of publicity - but it won't always be positive.

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