What is CEO Talent Worth?

Abstract

The topic of executive compensation elicits strong emotions among corporate stakeholders and practitioners. On the one hand are those who believe that chief executive officers in the United States are overpaid. On the other hand are those who believe that CEOs are simply paid the going fair-market rate.

Much less effort, however, is put into determining whether total compensation is commensurate with the value of services rendered. We examine the issue and explain how such a calculation might be performed.

We ask: How much value creation should be attributable to the efforts of the CEO? What percentage of this value should be fairly offered as compensation? Can the board actually perform this calculation? If not, how does it make rational decisions about pay levels?

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: executive compensation, CEO compensation, incentives

JEL Classification: D71, D83, G30, G34