30 Scientific Facts about CEO Pay that you can not afford to Ignore

30 Scientific Facts about CEO Pay that you can not afford to Ignore
Last Updated: May 29, 2023

30 Scientific Facts about CEO Pay that you can not afford to Ignore

CEO pay has been debated for many years, with some arguing that it is excessive and others claiming it is necessary to attract and retain top talent. But what does the scientific research say about CEO pay? In this article, we will explore 30 known facts about CEO pay based on scientific research. From the impact of CEO pay on firm performance to the gender pay gap among CEOs, we will cover it all. If you're curious about what the data says about CEO pay, keep reading!

Related: CEO Pay Ratio: What you need to know

CEO Pay Insights

  1. Company size is the biggest factor determining CEO pay, accounting for 40% of the variation in CEO pay. Surprisingly firm performance accounts for as little as 5% of the variation in CEO pay.
  2. There are differences in the compensation structure offered to CEO recruited from outside and those from inside. During the early years of tenure, outside CEOs receive more equity-based compensation than inside CEOs. However, as tenure increases for inside CEOs, the percentage of equity-based compensation decreases. The study also suggests that two main factors explain this effect of tenure on compensation structure: the portfolio consideration effect and the learning effect.
  3. A significant positive correlation exists between a CEO's tenure and the likelihood of their compensation being influenced by their preferences due to their influence on the Board.
  4. Compensation decisions reward several reputational, career, and educational credentials of CEOs. Newly-appointed CEOs earn a 5 percent total pay premium for each decile improvement in the distribution of these credentials. These findings are consistent with boards using credentials as publicly-observable signals of CEO abilities.
  5. Data from 1,241 public firms between 2014 and 2017 found that firms reduced CEO pay before disclosing their first pay ratio. This reduction was greater for firms with higher expected reputational costs from disclosing high pay ratios.
  6. Female CEOs have higher pay ratios than male CEOs, even after controlling for other factors. However, there was no significant difference in pay ratios between minority and white male CEOs. These findings suggest that gender diversity in leadership does not necessarily lead to lower pay inequality within companies.
  7. A study examined the effectiveness of shareholder proposals related to executive pay between 1997 and 2007. The sample includes 134 vote-no campaigns and 1,198 non-binding shareholder proposals. The study finds that union pension funds are the most frequent sponsor of these initiatives. However, they are not more likely to target unionized firms or firms with labour-related negotiations and disputes. The study also finds that activists tend to target firms with high CEO pay, regardless of whether it is excessive. Interestingly, voting support is higher in firms with excess CEO pay. Proposals attempting to micromanage the CEO pay level or structure receive little or no voting support. Instead, shareholders favor proposals related to the pay-setting process, such as subjecting certain compensation items to shareholder approval. These proposals are also more likely to be implemented. Finally, the study finds that firms with excess CEO pay targeted by vote-no campaigns experience a $2.3 million decrease in market value.
  8. The study proposes a new metric for CEO pay. The B-ratio measures CEO pay in relation to the total payroll of a firm. The B-ratio is believed to be more informative and relevant than the commonly used CEO pay ratio, which measures CEO pay over the median salary of a firm's employees. The B-ratio allows for a comparison of how much a typical employee contributes to the salary of their CEO. According to the study, for S&P500 firms, the B-ratio is $273 on average or 0.5% of one's salary. This means that each employee implicitly contributes $273 to their CEO's salary on average. However, the study notes that determining whether this contribution is worthwhile requires an assessment of the value of the CEO for the organization and its workers and stakeholders.
  9. Companies in the U.K. that employ multiple compensation consultants tend to pay their CEOs higher equity-based pay. The research analyzed data from a sample of companies over four years, from 2003 to 2006. The study found that an increase in compensation consultants is associated with an increase in CEO equity-based pay. In contrast, no CEO pay decline occurs when firms reduce the number of pay consultants.
  10. A significant positive relationship exists between CEO and director compensation, even after controlling for monitoring proxies. The correlation between unobserved firm complexity or excessive compensation of directors and managers could explain this relationship. The study also found that firm underperformance is linked to excess compensation for directors and CEOs. These findings suggest that mutual back-scratching or cronyism may cause excessive compensation, which ultimately harms firm performance.
  11. Research shows that CEOs do matter and that their abilities have an impact on firm performance. A study assessed that the stock price reaction upon the CEO's departure shows that it is negatively related to the firm's prior performance and the CEO's prior pay. This indicates that CEOs who are paid more and have a better track record tend to have a more negative impact on the company when they leave.
  12. Adopting the full Australian Securities Exchange recommendations for remuneration committee formation and structure can positively impact shareholder dissent and the CEO pay-performance link. Specifically, having a minority-and majority-independent remuneration committee and a committee of at least three members is associated with lower shareholder dissent. Companies with an independent committee have a stronger CEO pay-performance link. A majority-independent committee strengthens the link between performance and growth in CEO pay. These findings suggest that companies adopt these recommendations to improve their relationships with shareholders and ensure that CEO pay is more closely tied to performance. By doing so, companies may be able to reduce shareholder dissent and increase transparency in their executive compensation practices.
  13. In China, from 2006 to 2015, a study examined whether gender diversity on compensation committees objectively determined CEOs' compensation. According to the findings, having gender-diverse compensation committees can restrict the total cash compensation of CEOs and enhance the correlation between CEO remuneration and company performance. However, it is crucial to note that only female independent directors have a substantial influence. Additionally, committees with a critical mass of female directors substantially impact CEOs' overall pay and the relationship between CEO compensation and firm performance compared to committees with only one female director. These findings suggest that having gender diversity on compensation committees can lead to a more objective determination of CEOs' compensation, particularly when there is a critical mass of female directors.
  14. From this paper, it can be concluded that gender diversity in the boardroom significantly impacts CEO pay and CEO pay-performance links. The study found that companies with more gender diversity on their boards tend to have lower CEO pay. Additionally, the research suggests that having women directors on the Board strengthens the relationship between CEO pay and firm performance. The findings suggest promoting gender diversity in the boardroom can positively affect CEO pay and firm performance.
  15. The rise in CEO pay by a factor of six from 1980 to 2003 can be explained by the corresponding six-fold increase in market capitalization of major American corporations during that same time frame.The paper presents a simple equilibrium model of CEO pay, which suggests that the firm's size determines CEO pay. The data support the model's findings, as large firms' size explains many CEO pay patterns across firms, over time, and between countries. The research also finds very little dispersion in CEO talent, which justifies large pay differences.
  16. This paper analyzed the impact of changes in accounting and shareholder returns on CEO pay in 99 British companies between 1972, and 1989.There is a strong positive relationship between CEO pay and within-company changes in shareholder returns, but no statistically significant relationship between CEO pay and within-company changes in accounting returns. The study also found that differences between firms in long-term average profitability have a substantial effect on CEO pay. In contrast, differences between firms in shareholder returns do not add anything to the within-firm pay dynamics. These results suggest that share-based incentive schemes may not be an effective way to incentivize CEOs. Overall, this study highlights the importance of considering both accounting and shareholder returns when analyzing CEO pay and the potential limitations of share-based incentive schemes.
  17. This paper assessed the compensation of 755 Canadian firms from 1991-1995. Previous studies show CEO pay increases with firm size. The study also found that executives in utilities earn lower pay than their counterparts in other industries, and their compensation is less responsive to performance. Two novel findings were also documented. First, the sales elasticity of CEO compensation is greater in larger firms, meaning that CEO pay is more sensitive to changes in sales for larger companies.
  18. There is statistical evidence to challenge three common perceptions about CEO compensation and governance in the United States. Firstly, it disputes that CEOs are overpaid and that their pay keeps increasing. While CEO pay increased significantly during the 1990s, it has declined by more than 30% since then, from peak levels reached around 2000. Compared to corporate net income or profits, CEO pay levels at S&P 500 companies are currently at their lowest point in the last two decades. Secondly, the article challenges the belief that CEOs are not paid for their performance. According to the data presented in this article, CEO pay is positively correlated with company performance. In other words, CEOs who perform better tend to receive higher compensation. Finally, the article disputes that boards do not penalize CEOs for poor performance. The authors argue that boards penalize underperforming CEOs by reducing their compensation or terminating their employment. Overall, this article suggests that some commonly held beliefs about CEO compensation and governance in the United States may be inaccurate. While there may be cases of excessive CEO pay and poor governance practices, the statistical evidence presented in this article suggests that these issues may be less widespread than commonly believed.
  19. Based on the data collected on CEO compensation in China's publicly traded firms from 2000 to 2010, several significant changes have been documented in CEO pay, ownership, and board structure. Firstly, it was found that CEO pay positively correlates to accounting and stock market performance, although the link to accounting performance is more robust. This could suggest that CEOs who perform well in financial metrics are rewarded with higher pay. Secondly, the study found that CEO pay dynamics are important as pay in the current year is significantly positively correlated to CEO pay in the previous year. This indicates a degree of inertia in CEO pay, whereby past performance and compensation influence current compensation. Thirdly, the study found that board and ownership structure influence CEO equity ownership and equity grants.
  20. The Researchers in this study analyzed the relationship between CEO pay and performance in 390 UK non-financial firms from the FTSE All Share Index from 1999-2005. The study included cash and equity-based components of CEO compensation and CEO wealth based on share holdings, stock options, and stock awards holdings. The authors also controlled for a comprehensive set of corporate governance variables. Compared to previous findings for U.S. CEOs, the study found that pay-performance elasticity for U.K. CEOs seems to be lower. Specifically, pay-performance elasticity for U.K. CEOs was found to be 0.075 (0.095) for cash compensation (total direct compensation), indicating that a ten percentage increase in shareholder return corresponds to an increase of 0.75% (0.95%) in cash (total direct) compensation. The authors also found that the median share holdings and stock-based pay-performance sensitivity positively related to firm performance.
  21. The research examined senior management compensation policies for companies affected by bankruptcy or debt restructuring in publicly traded firms. The study found that almost one-third of all CEOs are replaced during these events, and those who keep their jobs often experience large salary and bonus reductions. Newly appointed CEOs with ties to previous management are typically paid 35% less than the CEOs they replace. In comparison, outside replacement CEOs are typically paid 36% more than their predecessors and are often compensated with stock options. The study also found that CEO wealth is significantly related to shareholder wealth after firms renegotiate their debt contracts. These findings suggest that bankruptcy or debt restructuring events affect senior management compensation policy, with significant changes in CEO compensation and a potential link between CEO wealth and shareholder wealth.
  22. The findings from this study suggest that privatized firms have lower total CEO compensation than private firms never owned by governments. The study also found that CEO equity-linked wealth in privatized firms is less sensitive to stock performance, and equity compensation is negatively related to government ownership stakes. This suggests that government ownership may limit the use of equity compensation to incentivize CEOs in privatized firms. In addition, the study found that privatized companies engage in less risk-taking than none privatized companies, which could explain differences in CEO compensation. This suggests that government risk aversion may be a factor in determining CEO compensation in privatized firms. These findings suggest government ownership can significantly impact CEO compensation and risk-taking behaviour in privatized firms. The lower total CEO compensation and reduced sensitivity of equity-linked wealth to stock performance may reflect limitations on using equity compensation as an incentive. In contrast, the reduced risk-taking behavior may reflect government risk aversion.
  23. CEO compensation for completing M&A deals is influenced by their power to influence board decisions. This study found that 39% of acquiring firms in their sample compensate their CEOs for completing the deal, mainly in the form of a cash bonus. The researchers discovered that CEOs with more power to influence board decisions receive significantly larger bonuses. There is a positive relationship between bonus compensation and measures of effort, but not between bonus compensation and deal performance. The study also revealed that CEOs with more power tend to engage in larger deals relative to the size of their firms, and the market responds more negatively to their acquisition announcements. The evidence suggests that M&A bonuses are primarily driven by managerial power. Overall, this study suggests that CEO compensation for completing M&A deals is not solely based on deal performance but rather on the CEO's level of power and effort put into the deal.
  24. The study compares the risk-adjusted CEO pay for the U.S. and the U.K., considering the estimated risk premiums from equity incentives. The study finds that while U.S. CEOs have higher pay, they also bear much higher stock and option incentives than U.K. CEOs. The study found that when taking into account the risks involved, U.S. CEO pay is not much different from that of U.K. CEOs. The study also looked at pay and incentives for non-U.K. European CEOs compared to U.S. CEOs and found that adjusting for risk may explain why U.S. CEOs appear to be paid more than their European counterparts. Overall, this study provides insights into the differences in CEO pay and equity incentives between countries and highlights the importance of considering risk premiums when comparing CEO compensation across different regions.
  25. There is a positive relationship between CEO pay and the risk of dismissal. U.S. CEOs receive a 3% increase in pay for each percentage point increase in the risk of dismissal. This implies that CEOs with a higher risk of being fired are compensated with higher pay.
  26. Using sales growth as a performance metric in CEO compensation contracts in India could be more appropriate than using stock return-based metrics. This study found that sales growth is used as a performance metric in Indian CEO pay arrangements and that the weight placed on this metric is positive and higher for more powerful CEOs. However, board vigilance can moderate the weight on sales growth in CEO pay arrangements. Interestingly, the study found that the weight placed on sales growth in assessing CEO pay negatively impacts future firm performance, particularly for financially constrained firms. This suggests that while sales growth can incentivize CEOs to pursue earnings growth consistent with shareholder value maximization, it may not always lead to long-term success for the company. Overall, using sales growth as a performance metric in Indian CEO compensation contracts can be effective if used appropriately and with proper board oversight.
  27. A study examined CEO salaries at 668 regional chapters of a public benefit nonprofit organization in the U.S. while considering the connection between hiring and compensation disparities. The study found that the underrepresentation of women CEOs in more resourceful organizations is the root cause of the gender pay gap for nonprofit executives. This means that women are not hired as CEOs in these organizations, resulting in fewer women receiving higher salaries. Therefore, improving gender equity in hiring will help narrow the pay disparity between male and female CEOs.
  28. Better-governed firms tend to pay their CEOs less for luck. Firms with stronger governance structures are more likely to align CEO pay with long-term performance rather than short-term fluctuations in luck.
  29. When a company's stock performance goes up, the CEO's pay increases more than it does when the stock performance goes down. This is more pronounced when the company has weak corporate governance, which means there is low institutional ownership. Pay-for-luck persists as remuneration increases with random positive shocks, even when the CEO has equity awards that explicitly condition firm performance relative to peer firms in the same sector. The study suggests that a major reason relative performance contracts do not eliminate pay for luck is that CEOs fail to meet the terms of their past performance awards.
  30. The study examined the impact of pay differences between the CEO and other top management team members on a firm's competitive behavior. The authors used data from the U.S. pharmaceutical industry. They found a positive relationship between the CEO pay gap and firm competitive behaviour. This means firms with larger pay gaps tend to engage in more complex competitive moves.


Related: Job Description of a CEO: Everything you need to know


In conclusion, scientific research on CEO pay has revealed many interesting and sometimes surprising findings. We now know that CEO pay can positively and negatively affect firm performance. We have learned that the public perception of CEO pay is often at odds with reality. By understanding these 30 facts about CEO pay, we can have a more informed and nuanced discussion about this important issue.

Cindy Baker
Memory Nguwi
Memory Nguwi is the Managing Consultant of Industrial Psychology Consultants (Pvt). With a wealth of experience in human resources management and consultancy, Memory focuses on assisting clients in developing sustainable remuneration models, identifying top talent, measuring productivity, and analyzing HR data to predict company performance. Memory's expertise lies in designing workforce plans that navigate economic cycles and leveraging predictive analytics to identify risks, while also building productive work teams. Join Memory Nguwi here to explore valuable insights and best practices for optimizing your workforce, fostering a positive work culture, and driving business success.

Related Articles


Sign up now to get updated on latest posts and relevant career opportunities