Are CEOs in Public U.S. Firms Overpaid? New Evidence from Private Firms
Nanyang Technological University
University of British Columbia (UBC) - Sauder School of Business; China Academy of Financial Research (CAFR)
Michael L. Lemmon
University of Utah - Department of Finance
March 15, 2012
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.
Number of Pages in PDF File: 49
Keywords: CEO annual compensation; equity incentives; pay structure; pay-performance sensitivity; private firms; public firms
JEL Classification: G34
Date posted: March 17, 2010 ; Last revised: March 19, 2012
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