A Reality Check on Executive Compensation

8 Pages Posted: 15 Aug 2013 Last revised: 4 Sep 2013

Date Written: August 14, 2013


Leading approaches to executive compensation focus either on optimal contracting models or managerial power’s effect on the compensation-setting process. While both methods might suggest why the process works poorly, and how to improve it, neither method can tell us just how much this compensation should be.

This comment uses the annualized billing rates of top lawyers, accountants and management consultants as an arms-length comparable for top business talent. Even allowing for a sizable (100%) margin of error/non-comparability, current compensation levels of CEOs of large U.S. companies cannot be justified, particularly with regard to stock options.

The comment suggests that when CEO compensation exceeds two-to-three times the annualized cost of top professional business talent, the burden should be on directors and CEOs to demonstrate that compensation is justified, rather than on investors to show the compensation is unreasonable.

Note -- This article arises from the entirely private research activities of the author and does not reflect the views of author's employers, past or present, nor any other organizations with which the author is or has been affiliated.

Keywords: corporate governance, executive compensation, corporate law, agency, compensation, self dealing

JEL Classification: G30

Suggested Citation

Zafft, Robert, A Reality Check on Executive Compensation (August 14, 2013). Available at SSRN: https://ssrn.com/abstract=2309792 or http://dx.doi.org/10.2139/ssrn.2309792

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