The 'Buy Side' View on CEO Pay

9 Pages Posted: 30 Aug 2016 Last revised: 2 Dec 2016

See all articles by David F. Larcker

David F. Larcker

Stanford University - Graduate School of Business

Brendan Sheehan

Rivel Research Group

Brian Tayan

Stanford University - Graduate School of Business

Date Written: September 1, 2016

Abstract

Executive compensation is a highly controversial topic. Journalists, governance commentators, and members of the American public believe that the majority of CEOs are overpaid. Missing from the discussion, however, is the viewpoint of the institutional portfolio managers that owns shares in these corporations and make buy and sell decisions.

In this Closer Look, we review proprietary survey data from Rivel Research Group examining how institutional (“buy-side”) investors view CEO compensation. We ask:

• How do buy-side investors and the general public differ in their evaluation of executive compensation? • Which constituency is “correct”? • What performance metrics are more effective in linking pay with performance: operating or stock-price metrics? • How much downside risk should an executive be exposed to?

The Stanford Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance and executive leadership. 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 books "Corporate Governance Matters" and "A Real Look at Real World Corporate Governance."

Keywords: CEO compensation, executive pay, pay for performance, correlation of pay to performance metrics, compensation committees, corporate governance research, proxy advisory firms

JEL Classification: G3, G30, G34, J3

Suggested Citation

Larcker, David F. and Sheehan, Brendan and Tayan, Brian, The 'Buy Side' View on CEO Pay (September 1, 2016). Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance No. CGRP-60. Available at SSRN: https://ssrn.com/abstract=2831619

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)

Brendan Sheehan

Rivel Research Group ( email )

57 Greens Farms Road
Westport, CT 06880
United States

Brian Tayan

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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