The 'Buy Side' View on CEO Pay
9 Pages Posted: 30 Aug 2016 Last revised: 2 Dec 2016
Date Written: September 1, 2016
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: Suggested Citation