The C.E.O. compensation controversy: Some recent evidence

Some of the important issues in the present controversy regarding chief executive officer (CEO) compensation are examined. Previous studies have identified factors that reliably predict levels of CEO salaries, such as: 1. firm size, 2. profitability, 3. return to shareholders, and 4. years as CEO. Compensation data and number of years as CEO were collected for 789 companies for the years 1991 and 1992. The log of sales was used as the size measure. Patterns in the data show that the most important components for determining CEO compensation are size and short-term profit over sales. These patterns can be interpreted as indicating the failure of corporate compensation committees to direct CEO performance toward long-term maximization of shareholder wealth. It is in the development of stock option plans that the link between performance and compensation should be appropriately reinforced.