When Is CEO Pay “Excessive?”
Guest Blogger: Prof. Troy A. Paredes
Yesterday, we got news of a decision handed down by Justice Ramos of the Supreme Court of the State of New York finding that former NYSE Chairman and CEO Richard Grasso had to pay back millions of dollars in compensation he had received while on the job. I want to flag some general points that might bear on a consideration of Grasso’s pay and on executive compensation more generally.
Critics of executive pay assert that CEO pay is “excessive.” But what does it mean for CEO pay to be “excessive”? Some say that CEOs just shouldn’t be paid more than a certain amount, period. Others argue that CEO pay is “excessive” when CEOs earn several hundred times what the average worker gets. At least CEOs should have to perform to get paid, critics say; they shouldn’t get paid just for showing up.
The only point I want to make here is this: Determining when CEO pay is “excessive”-–in other words, determining how much a CEO “deserves” – can’t be reduced to conclusory claims about what is “too much.” The intimation often seems to be that a CEO should accept his or her reservation price, or something approaching it, as opposed to having an opportunity to take home a larger share of the pie – a view that seems to be colored by the fact that a CEO is bound by a fiduciary duty of loyalty. To say “too much,” though, has no more content than to say “too little.” In either case, one needs a theory of compensation grounded in efficiency, equity, or both.
More to the point, why not view the negotiation between the CEO and the board over the CEO’s pay through the lens of market contracting and not through the lens of fiduciary duty? If one views executive pay through the lens of market contracting, it’s not clear that the CEO would have a duty in effect to negotiate against himself in dealing with the board. That said, CEOs should not be allowed to set their own pay by controlling the board. However, corporate governance changes have already been made – as a result of both regulation and market pressure – to better ensure arm’s-length bargaining. At public companies, for example, independent directors and shareholders now have a greater say over the compensation awarded to executives. In addition, the SEC has revised disclosure requirements to make executive pay more transparent, further empowering shareholder oversight. These tactics for reforming the process by which executive compensation is set are preferable to more substantive regulation that tends toward capping executive pay.
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As this is my final post as a guest blogger on Jim Hamilton’s wonderful blog, I again want to thank Jim for allowing me to contribute. It’s been a lot of fun.
Those of you interested in my research can find out more by visiting my author page on ssrn.com at http://ssrn.com/author=109202.