Executive Compensation and Public Indignation

Abstract

This research rejects the conventional story, that strong CEO’s take advantage of shareholders by co-opting the Board of Directors. Shareholder voting at the AGM of large public companies, at least in companies without a concentrated ownership, support the pay arrangements that come out of a one-on-one negotiation between a CEO Candidate and the Chairman of the Board. Our story is that the Board Chairman contracts with the Candidate without any restraining influence from the Board - or from a committee of the Board. Benefits of bonding and esteem-signaling to peers, explain levels of executive pay in that the utility of anticipated benefits is stronger than the disutility of public indignation. We propose that new reference points, available in response to demands for more transparency in executive pay arrangements, have in fact lead to spiraling CEO compensation - which leads to public indignation. The paper has been written in an effort to shed new light on the mechanisms that determine the shape of CEO compensation.