Excessive CEO Pay: Background and Policy Approaches Page: 4 of 9
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Excessive CEO Pay: Background and Policy Approaches
Publicly traded corporations-those required to file financial statements with the Securities and
Exchange Commission (SEC)-must in their annual proxy statements disclose the total
compensation of the five highest-paid executives. These data, as compiled by various
publications, consultants, and information vendors, comprise the basis for all public statistics on
executive compensation. Other than the top five individuals, corporations generally provide no
information about management pay.
Most accounts of executive compensation are not based on comprehensive statistics, but on
samples. For example, Business Week for many years published tables of CEO pay at 300 or 400
large corporations. These figures (which are presented in CRS Report 96-187, A Comparison of
the Pay of Top Executives and Other Workers, by Linda Levine) show that the ratio of average
CEO pay to average non-management worker pay rose from 50:1 in 1980 to 349:1 in 2004. This
raises the question of whether public shareholders (who are CEOs' employers) get their money's
The results of the numerous academic studies of the relationship between CEO pay and corporate
performance are mixed. Few would dispute Warren Buffett's claim that "... it's difficult to
overpay the truly extraordinary CEO of a giant enterprise. But this species is rare."' More
controversial, but not without support in the empirical literature, is his additional observation:
Getting fired can produce a particularly bountiful payday for a CEO.... Forget the old maxim
about nothing succeeding like success: Today, in the executive suite, nothing succeeds like
This may be why CEOs attract more resentment and criticism than wealthy athletes, movie stars,
or entrepreneurs-their pay often goes up even when their performance is mediocre or worse, and
they preside over organizations created and maintained by others, where their personal
contributions are not always easy to discern. The perception that many, if not all, top executives
are overpaid raises issues about the compensation process.
CEOs serve at the pleasure of the board of directors, who represent the interests of-and are
elected by-shareholders. Executive pay is set by the board. In principle, boards should bargain
on the shareholders' behalf, creating a competitive market for executive services. However, there
are several reasons why this might not happen.
Directors are elected by shareholders, but usually nominated by management, and it is extremely
rare for management's slate of directors to be voted down. According to various observers, once
on the board, directors are reluctant to press managers on pay because unless cordial relationships
prevail, the board will find it difficult to function.3 Rather than haggle, they often hire
compensation consultants, who recommend a "best practices" approach, which generally means
1 "To the Shareholders of Berkshire Hathaway Inc.," Berkshire Hathaway 2005 Annual Report, p. 16.
s This would help explain why CEO pay never seems to fall even though polls show that significant numbers of
directors believe CEOs are overpaid: no one wants to be the first to cut pay.
Congressional Research Service
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Excessive CEO Pay: Background and Policy Approaches, report, November 29, 2007; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc810960/m1/4/: accessed February 20, 2019), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.