CEO compensation is a highly controversial subject. While most company directors believe that CEO pay is not a problem, the majority of the American public believes that it is. The difficulties that boards face in justifying CEO pay levels in some ways stem from the challenge of quantifying how much value a CEO creates and how much of this value should be shared as compensation. We examine this topic in detail and ask: Why are CEO compensation arrangements not explicitly tied to value creation? How much does a CEO personally contribute to corporate performance? How is corporate performance best measured: by change in stock price or change in corporate profits? What portion of shareholder value creation should a CEO receive in pay? Why don’t companies explicitly calculate and disclose the relation between value creation and pay?
Copyright held by Nicholas E. Donatiello, David F. Larcker, and Brian Tayan. Further inquiries about reproduction and use should be directed to the Corporate Governance Research Initiative.
