CEO Compensation: Evidence From the Field

Abstract

We survey directors and investors on the objectives, constraints, and determinants of CEO pay. 67% of directors would sacrifice shareholder value to avoid controversy on CEO pay, implying they face significant constraints other than participation and incentive compatibility. These constraints lead to lower pay levels and more one-size-fits-all structures. Shareholders are the main source of constraints, suggesting directors and investors disagree on how to maximize value. Respondents view intrinsic motivation and reputation as stronger motivators than incentive pay. They believe pay matters to CEOs not to finance consumption, but because it affects perceptions of fairness. The need to fairly recognize the CEO's contribution explains why flow pay responds to performance, even though CEOs' equity holdings already provide substantial consumption incentives, and why peer firm pay matters beyond retention concerns. Fairness also matters to investors, with shareholder returns an important reference point. This causes CEO pay to be affected by external risks, in contrast to optimal risk sharing.

The social construction of executive pay: governance processes and institutional isomorphism

“…(FRC, 2015). Decisionmaking on KMP pay is a priority for every firm (Edmans et al, 2021). Corporate governance principles state that design of associated policies and practices ought to enable the firm's long-term strategy to be enacted (FRC, 2018).…”

“…The role of KMP pay in pursuit of organisational effectiveness is contested (e.g., Aggarwal, 2008;Frydman and Jenter, 2010;Pepper and Gore, 2015). Its roots in the scholarly literature reach back as far as the first quarter of the 20 th century (Taussig and Barker, 1925), and it continues receiving more attention than most other routine corporate decisions (Edmans et al, 2021). Interest ranges across a spectrum from functional concern with the attraction, retention and motivation of KMP and the interrelationship of their pay with internal equity, to corporate performance controversies and public perceptions of the legitimacy of big business in society (Safwat, 2015).…”

“…Also consistent with normative isomorphism, the professionalisation of specialist advice from pay consultants may compound KMP pay ratcheting. Responding to political demands, institutional investors may set out their own selection of pay-performance metrics, enforcing these by threat of withholding votes on policy and/or their confidence in Remco members' tenure (Edmans et al, 2021;Lozano-Reina and Sánchez-Marín, 2020). Possibly signalled during in-camera "briefings" ahead of public AGMs (explaining the high incidence of policy endorsement), these indications may inhibit Remcos enhancing pay design fitted to corporate specificities in favour of generic measures such as "total shareholder return" (Perkins, 2015, p.44).…”

Executive Compensation - Ethical Issues in Human Resource

“…Companies may engage in an executive compensation "arms race" in which each company competes to pay their senior executives the most money. Firms will attract the broadest pool of people to their business by building a reputation for high compensation (Edmans, Gosling, & Jenter, 2021).…”

“…To begin with, the pay of a corporation's management team must be viewed as equitable (Edmans et al, 2021). Pay is normally determined in this situation based on the pay-for-performance relationship to comprehend their compensation inequalities, executives must be able to compare their inputs to the business (Alolah, 2022).…”