CEO Pay and Corporate Governance in the U.S.: Perceptions, Facts, and Challenges


  • Steven N. Kaplan

    1. STEVE KAPLAN is the Neubauer Professor of Entrepreneurship at the University of Chicago Booth School of Business and a Research Associate of the National Bureau of Economic Research (NBER). Kaplan serves on public company and mutual fund boards.*
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  • I thank Douglas Baird, Effi Benmelech, Don Chew, Carola Frydman, Austan Goolsbee, Jeff Miron, Lawrence Mishel, Raghu Rajan, Amir Sufi, Luke Taylor, and Rob Vishny for helpful comments. Wei Wu provided excellent research assistance. A version of this paper appeared in the Cato Papers on Public Policy. This paper also formed the basis for the 2012 Martin Feldstein Lecture at the NBER. I thank the Cato Institute, the Center for Research in Security Prices, and the NBER for financial support.


This article brings a broad range of statistical studies and evidence to bear on three common perceptions about the CEO compensation and governance of U.S. public companies: (1) CEOs are overpaid and their pay keeps increasing; (2) CEOs are not paid for their performance; and (3) boards do not penalize CEOs for poor performance.

While average CEO pay increased substantially during the 1990s, it has declined since then— by more than 30%—from peak levels that were reached around 2000. Moreover, when viewed relative to corporate net income or profits, CEO pay levels at S&P 500 companies are the lowest they've been in the last 20 years. And the ratio of large-company CEO pay to firm market value is roughly similar to its level in the late 1970s, and lower than the levels that prevailed before the 1960s. What's more, in studies that begin with the late '70s, private company executives have seen their pay increase by at least as much as public companies. And when set against the compensation of other highly paid groups, today's levels of CEO pay, although somewhat above their long-term historical average, are about the same as their average levels in the early 1990s.

At the same time, the pay of U.S. CEOs appears to be reasonably highly correlated with corporate performance. As evidence, the author cites a 2010 study reporting that, over the period 1992 to 2005, companies with CEOs in the top quintile (top 20%) of realized pay in any given year had generated stock returns that were 60% higher than the average companies in their industries over the previous three years. Conversely, companies with CEOs in the bottom quintile of realized pay underperformed their industries by almost 20% in the previous three years. And along with lower pay, the CEOs of poorly performing companies in the 2000s faced a significant increase in the likelihood of dismissal by their own boards.

When viewed together, these findings suggest that corporate boards have done a reasonably good job of overseeing CEO pay, and that factors such as technological advances and increased scale have played meaningful roles in driving the pay of both CEOs and others with top incomes—people who are assumed to have comparable skills, experience, and opportunities. If one wants to use increases in CEO pay as evidence of managerial power or “board capture,” one also has to explain why the other professional groups have experienced similar, or even higher, growth in pay. A more straightforward interpretation of the evidence reviewed in this article is that the market for talent has driven a meaningful portion of the increase in pay at the top. Consistent with this conclusion, top executive pay policies at roughly 97% of S&P 500 and Russell 3000 companies received majority shareholder support in the Dodd-Frank mandated “Say-on-Pay” votes in 2011 and 2012, the first two years the measure was in force.