Working Paper: NBER ID: w18395
Authors: Steven N. Kaplan; Douglas Baird; Effi Benmelech; Carola Frydman; Austan Goolsbee; Jeff Miron; Lawrence Mishel; Raghu Rajan; Amir Sufi; Luke Taylor; Rob Vishny
Abstract: In this paper, I consider the evidence for three common perceptions of U.S. public company CEO pay and corporate governance: (1) CEOs are overpaid and their pay keeps increasing; (2) CEOs are not paid for their performance; and (3) boards do not penalize CEOs for poor performance. While average CEO pay increased substantially through the 1990s, it has declined since then. CEO pay levels relative to other highly paid groups today are comparable to their average levels in the early 1990s although they remain above their long-term historical average. The ratio of large-company CEO pay to firm market value is roughly similar to its level in the late-1970s and lower than its pre-1960s levels. These patterns suggest that similar forces, likely technology and scale, have played a meaningful role in driving CEO pay and the pay of others with top incomes. With regard to performance, CEOs are paid for performance and penalized for poor performance. Finally, boards do monitor CEOs. The rate of CEO turnover has increased in the 2000s compared to the 1980s and 1990s, and is significantly tied to poor stock performance. While corporate governance failures and pay outliers as well as the very high average pay levels relative to the typical household undoubtedly have contributed to the common perceptions, a meaningful part of CEO pay appears to be market determined and boards do appear to monitor their CEOs. Consistent with that, top executive pay policies at over 98% of S&P 500 and Russell 3000 companies received majority shareholder support in the Dodd-Frank mandated Say-On-Pay votes in 2011.
Keywords: CEO Pay; Corporate Governance; Executive Compensation; Market Forces; Performance Monitoring
JEL Codes: G30; G32; J33; L2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| average CEO pay (M12) | firm performance (L25) |
| realized pay (J33) | stock returns (G12) |
| CEO turnover (M12) | firm performance (L25) |
| CEO pay (M12) | CEO turnover (M12) |
| CEO performance monitoring (M12) | CEO turnover (M12) |