Seven Myths of Executive Compensation

IntroductIon Executive compensation is perhaps the most contentious issue in corporate governance today. Common consensus holds that CEOs of publicly traded U.S. corporations, particularly the largest U.S. corporations, are overpaid. It is also widely believed that the structure of CEO pay is inappropriate, that rewards are offered without regard to performance, and that compensation design encourages excessive risk-seeking behavior that is costly to shareholders.1 To cure these, activists have stepped up efforts to rein in pay, and Congress passed the Dodd-Frank Act of 2010 which, among its many provisions, mandates a series of compensation reforms.2 While it is likely true that among some companies compensation is not merited based on performance, the truth about executive compensation is more nuanced than common consensus suggests. Public debate would benefit from the clarification of several commonly held misconceptions.