Are CEOs in Public U.S. Firms Overpaid? New Evidence from Private Firms

49 Pages Posted: 17 Mar 2010 Last revised: 19 Mar 2012

See all articles by Huasheng Gao

Huasheng Gao

Fanhai International School of Finance, Fudan University

Kai Li

University of British Columbia (UBC) - Sauder School of Business; Asian Bureau of Finance and Economic Research (ABFER); China Academy of Financial Research (CAFR); European Corporate Governance Institute (ECGI); Canadian Sustainable Finance Network (CSFN)

Michael L. Lemmon

University of Utah - Department of Finance

Date Written: March 15, 2012

Abstract

We provide new evidence on the debate whether CEOs in public U.S. firms are significantly overpaid using their counterparts in private U.S. firms over the period 1999 to 2008. Using public and private firm CEO pay data made available through mandated SEC disclosures, we first show that after controlling for firm and CEO characteristics, public firm CEOs are paid more than private firm CEOs, with a modest pay premium of about 20%, and public firm CEOs are given more on-going equity incentives. This public pay premium becomes economically insignificant after accounting for differences in risk, dividend policy, and CEO turnover between public and private firms. We then show that both public and private firm CEO annual compensation is positively and significantly related to firm accounting performance, and the pay-performance link is much stronger in public firms. We provide some evidence that the pay differential is related to labor market segmentation between the two types of firms and increasing over time. Finally, when firms transition from private to public status, we find that both the level and structure of pay change significantly in ways that corroborate our findings from the cross-section.

Keywords: CEO annual compensation; equity incentives; pay structure; pay-performance sensitivity; private firms; public firms

JEL Classification: G34

Suggested Citation

Gao, Huasheng and Li, Kai and Lemmon, Michael L., Are CEOs in Public U.S. Firms Overpaid? New Evidence from Private Firms (March 15, 2012). Available at SSRN: https://ssrn.com/abstract=1572406 or http://dx.doi.org/10.2139/ssrn.1572406

Huasheng Gao

Fanhai International School of Finance, Fudan University ( email )

Beijing West District Baiyun Load 10th
Shanghai, 100045
China
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2165642222 (Fax)

Kai Li

University of British Columbia (UBC) - Sauder School of Business ( email )

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Canada
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Asian Bureau of Finance and Economic Research (ABFER) ( email )

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Singapore

China Academy of Financial Research (CAFR) ( email )

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European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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Belgium

Canadian Sustainable Finance Network (CSFN) ( email )

Queens University
Kingston, ON
Canada

HOME PAGE: http://https://smith.queensu.ca/centres/isf/research/network.php

Michael L. Lemmon (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-5210 (Phone)
801-581-7214 (Fax)

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