Persistently Underpaid CEOs and Their Influence on Pay Benchmarks
45 Pages Posted: 9 Mar 2006 Last revised: 3 Feb 2016
Date Written: April 27, 2007
This paper analyzes whether frugal S&P 500 boards have used increasingly transparent pay data on their CEOs' peers to minimize the perceived inequity of persistent underpayment (relative to the peer group median). I find they do, and as a result median pay for the same performance has increased by at least 5% per year (after inflation), starting in the early 1980s. Legislation and listing requirements enacted to reduce excessive pay do not slow this increase. Boards likely are motivated to redress perceived pay inequities because CEOs paid less than peers underperform CEOs paid more. Outcomes expected based on the effect of perceived inequity and labor markets conditions are confirmed. Underpaid CEOs do not leave more frequently than overpaid CEOs, are hired less often, and are paid less. Former junior executives fill almost all demand; perform as well as former CEOs, but are paid 2/3rd as much.
Keywords: Compensation, Performance, Peer group, Fairness, Labor Market Demand
JEL Classification: D2, D3, G34, J3
Suggested Citation: Suggested Citation