Seven Myths of Executive Compensation

Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance No. CGRP-17

7 Pages Posted: 22 Jun 2011 Last revised: 3 Sep 2013

David F. Larcker

Stanford University - Graduate School of Business

Brian Tayan

Stanford University - Graduate School of Business

Date Written: June 21, 2011

Abstract

Executive compensation has become one of the most contentious topics in corporate governance. However, public perception about executive pay suffers from many misconceptions.

These include the notions that:

1. The ratio of CEO-to-average-worker pay is a useful statistic:
2. Compensation consultants cause pay to be too high:
3. It is easy to tell whether a compensation package encourages “excessive” risk taking:
4. Performance metrics and targets tie directly to the corporate strategy:
5. Discretionary bonuses should be eliminated:
6. Proxy advisory firms know how to evaluation compensation contracts:
7. The numbers in the financial statements for executive options accurately capture their cost and value:

We examine these myths in close detail and explain why they are false. Problems of excessive compensation and poorly structured contracts will not be remedied by artificial changes and congressional mandates. Why don’t experts rely on the research to arrive at informed and fact-based solutions?

Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.

Keywords: corporate governance research, executive compensation, pay for performance, incentives, equity pay

JEL Classification: G3, G30, I20, K20, K22, L20

Suggested Citation

Larcker, David F. and Tayan, Brian, Seven Myths of Executive Compensation (June 21, 2011). Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance No. CGRP-17 . Available at SSRN: https://ssrn.com/abstract=1869019 or http://dx.doi.org/10.2139/ssrn.1869019

David F. Larcker (Contact Author)

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

Brian Tayan

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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