The “Buy-Side” View on CEO Pay

By David F. Larcker, Brendan Sheehan, Brian Tayan

Stanford Closer Look Series. Corporate Governance Research Initiative, September 2016

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 own 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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