(Good) CEOs Are Underpaid - How To Fix Executive Pay - Harvard Business Review

(Good) CEOs Are Underpaid - How To Fix Executive Pay - Harvard Business Review

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How To Fix Executive Pay (Good) CEOs Are Underpaid9:00 AM Monday June 15, 2009
by Steve Kaplan>

The financial crisis and the recession have turned up the heat on U.S. corporate boards, exposing them to intense criticism for their decisions on executive compensation. But the evidence indicates that CEOs typically aren't overpaid - in fact, good CEOs may be underpaid.>

My research with Josh Rauh reveals that CEO pay has failed to keep pace with the rising compensation of top hedge fund managers, investment bankers, private equity investors, money managers, and lawyers. >

Here are a few data points that may surprise the politicians and other commentators who demonize boards and their highly paid CEOs:>

> The pay of other groups has increased substantially since the mid-1990s, and by at least the same order of magnitude as the CEOs'--evidence that CEOs aren't benefiting from cozy relationships with boards.>

> CEO pay in the U.S. peaked around 2000. Average pay has declined since then while median pay has been flat. Average and median pay for S&P 500 CEOs declined in 2008 and are likely to do so again in 2009.>

> CEOs made up only about 3% of the people with the top 0.1% of U.S. adjusted gross income in 2004-2005, a fraction that was little changed from a decade earlier. >

> The S&P 500 CEOs' fraction of the total income earned by the top 0.1% declined markedly from 1.2% in 2001 to 0.60% in 2006. That fraction is likely to have declined further in 2007 and 2008. >

> The top 20 hedge fund managers earned more than $20 billion in 2007, substantially more than the $7.5 billion combined income of all of the 500 CEOs of the S&P 500. >

> Take home pay for CEOs is strongly related to performance. >

Employment on Wall Street is a very real alternative for CEOs and top executives--many of the most successful corporate chief executives have moved to private equity firms as advisers or investors. Boards are well aware that they need to pay the going rate in order to attract and keep top executives. On the whole, they respond rationally to the inexorable force of the talent market. >


Steve Kaplan is the Neubauer Family Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business.>

Read full Post: http://blogs.harvardbusiness.org/hbr/how-to-fix-executive-pay/2009/06/good-ceos-are-underpaid.html

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This posting was made my Jim Jacobs, President & CEO of Jacobs Executive Advisors. Jim also serves as Leader of Jacobs Advisors' Insurance Practice.