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

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

Huasheng Gao

Nanyang Technological University

Kai Li

University of British Columbia (UBC) - Sauder School of Business; China Academy of Financial Research (CAFR)

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

Nanyang Technological University ( email )

S3 B2-A28 Nanyang Avenue
Singapore, 639798
Singapore

HOME PAGE: http://www3.ntu.edu.sg/home/hsgao/

Kai Li

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

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8353 (Phone)
604-822-4695 (Fax)

HOME PAGE: http://finance.sauder.ubc.ca/~kaili

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

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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