Responding to the Critics: Myths or Realities-Chapter 1 Summary

Chapter One Summary
There are a number of different and persistent criticisms of the executive pay model – e.g., CEO pay packages are excessive, CEO pay only rises due to the “ratchet effect,” pay packages at the individual company level are not related to corporate performance. Many of which are offered as the basis for additional regulation and other measures to reduce executive pay or change the structure of the executive pay model. We provide an exhaustive list of such prevailing criticisms and address each in turn. Our work illustrates via empirical evidence that—while there is some validity to some of the criticisms that may require regulatory or company-specific policy responses—many of them are unsubstantiated myths.

12 Prevailing Criticisms of the Executive Pay Model
1.    Criticism: CEO pay packages are excessive for many reasons, including its being a “rigged” market subject to crony capitalism
Response: Mostly myth
2.    Criticism: CEO pay only rises, due to the “ratchet effect” where companies chase an every rising market median
Response: Mostly myth
3.    Criticism: Pay packages, at the individual company level, are not related to corporate performance
Response: Myth
4.    Criticism: The structure and pay levels of these CEO pay packages do not motivate higher levels of corporate performance
Response: Mostly myth
5.    Criticism: CEOs rarely quit their current CEO jobs to take a higher-paying CEO job at a larger company or in a higher-paying industry
Response: Some reality, some myth
6.    Criticism: Executives set easy/soft financial goals for their cash and stock incentive plans
Response: Mostly myth
7.    Criticism: Executives are rarely fired for poor performance, and boards are slow to act on poor performance. The executives are equally highly paid equally for both success and failure
Response: Myth
8.    Criticism: U.S. CEOs are overpaid relative to equally high-performing CEOs in other countries
Response: Mostly myth
9.    Criticism: The executive pay model in the financial sector—high current cas compensation, low stock grants and stock ownership, insufficient deferrals—motivated short-term thinking and excessive risk taking
Response: Mostly myth
10.    Criticism: Executives do not own enough stock to be aligned with the shareholders
Response: Myth
11.    Criticism: Excessive executive pay is part of the cause of the “income inequality” problem and debate that is raging in the political world
Response: Mostly myth
12.    Criticism: The highly positive Say on Pay votes of 2011 and 2012 were misleading and did not truly indicate that the shareholders endorsed the executive pay model. The pay for performance models of the proxy advisors (ISS, etc.) are truly indicative of alignment of pay to performance
Response: Myth

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