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2016•SSRN Electronic JournalOpen access

The “Buy Side” View on CEO Pay

David F. Larcker, Brendan Sheehan, Brian Tayan

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Abstract

Executive compensation is a highly controversial topic. Journalists, governance commentators, and members of the American public believe that the majority of CEOs are overpaid. Missing from the discussion, however, is the viewpoint of the institutional portfolio managers that owns shares in these corporations and make buy and sell decisions. In this Closer Look, we review proprietary survey data from Rivel Research Group examining how institutional (“buy-side”) investors view CEO compensation. We ask: How do buy-side investors and the general public differ in their evaluation of executive compensation? Which constituency is “correct”? What performance metrics are more effective in linking pay with performance: operating or stock-price metrics? How much downside risk should an executive be exposed to?

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Executive compensation is a highly controversial topic. Journalists, governance commentators, and members of the American public believe that the majority of CEOs are overpaid. Missing from the discussion, however, is the viewpoint of the institutional portfolio managers that owns shares in these corporations and make buy and sell decisions. In this Closer Look, we review proprietary survey data from Rivel Research Group examining how institutional (“buy-side”) investors view CEO compensation. We ask: How do buy-side investors and the general public differ in their evaluation of executive compensation? Which constituency is “correct”? What performance metrics are more effective in linking pay with performance: operating or stock-price metrics? How much downside risk should an executive be exposed to?

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Available abstract

Executive compensation is a highly controversial topic. Journalists, governance commentators, and members of the American public believe that the majority of CEOs are overpaid. Missing from the discussion, however, is the viewpoint of the institutional portfolio managers that owns shares in these corporations and make buy and sell decisions. In this Closer Look, we review proprietary survey data from Rivel Research Group examining how institutional (“buy-side”) investors view CEO compensation. We ask: How do buy-side investors and the general public differ in their evaluation of executive compensation? Which constituency is “correct”? What performance metrics are more effective in linking pay with performance: operating or stock-price metrics? How much downside risk should an executive be exposed to?

Key concepts: Executive compensation, Corporate governance, Institutional investor, Compensation (psychology), Portfolio, Great Rift, Business, Accounting

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