Are U.S. CEOs Overpaid?

Executive Overview Critics of U.S. corporate governance claim that public company (a) CEOs are overpaid, (b) CEOs are not paid for performance, and (c) boards do a poor job of compensating and monitoring CEOs. In this paper, I argue that the critics are wrong. While corporate governance and CEO pay are not perfect, a great deal of evidence suggests that CEO pay is largely determined by market forces. CEOs have been affected by the same forces that have increased income inequality. They have not done better than several similar groups. (In fact, average CEO pay declined in real terms from 2000 to 2006.) CEOs are strongly paid for performance. And boards do monitor CEOs. CEO tenures are lower than they have been since tenures began to be measured in the 1970s; CEO turnover is more closely tied to stock performance than it has been since turnover began to be studied in the 1970s. Increased transparency for CEO pay (required by the SEC), increased shareholder activism, and the increased prevalence of majority voting in director elections should further reduce any remaining unwise compensation practices. More regulation, such as the proposed "Say on Pay" bill to mandate a shareholder vote on executive compensation, is likely to impose costs with little additional benefit.