Are Public Company CEOs Overpaid?

Many people think that CEOs of public companies are systematically overpaid. David F. Larcker and Brian Tayan, both of the Stanford University Graduate School of Business, disagree. In a paper recently posted on the Social Science Research Network, they argue as follows:

While it is true that certain individual executives in the U.S. receive compensation that is unmerited based on the size and performance of their company, the compensation awarded to the average CEO is much more modest than [some critics of CEO pay] suggest. Based on data from the 4,000 largest publicly traded companies, the average (median) CEO received total compensation of $1.6 million in fiscal year 2008. This figure includes salary, bonus, the fair value of equity-related grants, and other benefits and income. This does not seem like an unconscionable level of compensation for an around-the-clock job with tremendous responsibility.

Larcker and Tayan don’t mention it, but I would add that, although $1.6 million a year is a huge figure relative to what most people make, it is nevertheless a good deal less than what many sports stars, singers, and actors make, and even a good deal less than what many elite investment bankers and lawyers make. That is to say, it is good deal less than the income of many other people who are not the subject of public opprobrium because of their level of compensation.

Larcker and Tayan’s paper is derived from their new book, Corporate Governance Matters , which promises to be a good read.