Seven Myths of Executive Compensation

Abstract

Executive compensation has become one of the most contentious topics in corporate governance. However, public perception about executive pay suffers from many misconceptions. These include the notions that:1. The ratio of CEO-to-average-worker pay is a useful statistic:2. Compensation consultants cause pay to be too high:3. It is easy to tell whether a compensation package encourages “excessive” risk taking:4. Performance metrics and targets tie directly to the corporate strategy:5. Discretionary bonuses should be eliminated:6. Proxy advisory firms know how to evaluation compensation contracts:7. The numbers in the financial statements for executive options accurately capture their cost and value:We examine these myths in close detail and explain why they are false. Problems of excessive compensation and poorly structured contracts will not be remedied by artificial changes and congressional mandates. Why don’t experts rely on the research to arrive at informed and fact-based solutions?Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.