Dive Brief:
- When it comes to CEOs and their pay as it relates to performance, public company directors are overwhelmingly convinced that all is fair. For the general population, the connection is much less convincing, according to a recent survey.
- The research, released by Heidrick & Struggles and the Rock Center for Corporate Governance at Stanford University, found that 71% of directors polled believe that CEOs are paid the correct amount and that 87% believe that CEO compensation is tied to performance. The American public begs to differ, as most strongly believe that CEOs are overpaid and that pay levels should be reduced.
- This disconnect in perception poses significant challenges for corporate directors, according to an article at Hunt Scanlon Media. In addition, company directors give CEOs considerable credit for corporate success, believing that 40% of a company’s overall results, on average, are directly attributed to the CEO’s efforts,
Dive Insight:
David F. Larcker, a professor at Stanford Graduate School of Business, said the study found that directors give CEOs considerable credit for corporate performance, and while measuring a CEO's impact on performance is difficult to gauge, directors figure that CEOs are instrumental in the success or failure of an organization. He adds that the findings help to explain why CEO pay levels are as high as they are among the biggest U.S. companies.
Nonetheless, directors' efforts to align pay and performance don't work for the general public. Nick Donatiello, lecturer in corporate governance at Stanford Graduate School of Business, said if directors believe CEO pay is reasonable, but "most Americans believe that CEO pay is a problem, then you have a serious perception gap."
He says directors need to make a clear, convincing case that the pay they offer is deserved based on market realities, performance and a CEO's contribution to company results.