The “Buy Side” View on CEO Pay – Stanford Closer Look Series
By David F. Larcker, Brendan Sheehan, and Brian Tayan
September 1, 2016
Executive compensation is a highly controversial topic. Seventy percent of Americans believe that CEO compensation among large publicly traded corporations is a problem. Twenty-five percent of directors believe that CEOs do not receive the correct level of pay based on the expected value of awards when they are granted; and 30 percent of directors believe that CEOs do not receive the correct level of pay based on what they actually realize when those awards vest. Journalists, governance commentators, and proxy advisory firms also criticize pay levels and practices.
Editorialists at The Economist call executive compensation “neither rigged nor fair,” arguing that while pay is a function of market forces, those forces are not efficient in setting pay levels relative to
managerial value creation and average worker pay. The head of a university corporate governance center believes that there is a “bias toward escalating pay each year, which … further decouples pay from performance.” Proxy advisory firms Institutional Shareholder Services and Glass Lewis routinely recommend that shareholders vote against the proposed compensation plans of large U.S. companies as part of the annual “say on pay” voting process.