Are CEOs Overpaid? A Brief Look at CEO Incentive Pay and Compensation in the US

Abstract

According to statistics, CEO-to-worker compensation ratio for large publicly traded firms in the U.S. has surged almost fifteen times since the 1960’s. There is also a significant difference between CEO compensation and that of the average earner in the top 0.1 percent category (of around 5.5-to-1). However, the growth in CEO pay does not necessarily reflect correspondingly higher output or better firm performance, nor can the difference between CEO pay and that of the top 0.1 percent earners be explained by greater productivity or more talent. Some argue that, this growth is a form of rent-seeking behavior by CEOs who use their power to extract concessions and set their own pay by virtue of their positions and their control over the board of directors. But, why is this rent-seeking behavior permitted by stakeholders, especially the shareholders? Does this suggest weaknesses in the corporate governance structure which fails to discipline growth of CEO pay, or is the legal framework too weak or ineffective to really matter? Assuming that such high levels of inequality in pay are undesirable from a corporate governance and societal perspective, how can this issue be best tackled?