Bargain bosses: American chief executives are not overpaid

Economist
September 8, 2012

The idea that American bosses are obscenely overpaid is conventional wisdom, and not just among the true believers at the Democratic convention. The New York Times complains of “fat paychecks [awarded] to chief executives who, by many measures, don’t deserve them.” Forbes, hardly the in-house journal of Occupy Wall Street, frets that CEO pay is “gravity-defying”. An issue in April gave warning that “our report on executive compensation will only fuel the outrage over corporate greed.”

This orthodoxy rests on three propositions: that CEO pay just keeps on going up; that it is not tied to performance; and that boards are not doing their job of holding fat cats’ paws to the fire. These propositions in turn rest on a bigger argument: that CEOs are using their political power to rig the system, and that an efficient market for talent would produce very different results.

Steven Kaplan of Chicago’s Booth School of Business has been poking holes in this orthodoxy for years. He has now gathered his research together in a new paper (“Executive Compensation and Corporate Governance in the US: Perceptions, Facts and Challenges”).

His argument is well-grounded and intricate. He distinguishes, for example, between “estimated” and “realised” pay. Estimated pay is the estimated value of the CEO’s pay, including stock options, when the board does the hiring. Realised pay is what the CEO actually makes when he exercises his options. There is a big difference. It is now impossible to talk sensibly about this subject without first grappling with Mr Kaplan.

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