In our paper, CEO Compensation: Evidence from the Field, which was recently made available on SSRN, we survey over 200 directors of FTSE All-Share companies and over 150 investors in UK equities on how they design CEO pay packages: their objectives, the constraints they operate under, and the factors they take into account. The answers reveal several interesting results that challenge existing academic theories, which we organize into three groups:

Objective and constraints

We first ask respondents to rank the importance of three goals when setting CEO pay. 65% of directors view attracting the right CEO as most critical, while 34% prioritize designing a structure that motivates the CEO. For investors, these figures are 44% and 51% respectively. This reversal reflects a theme that recurs throughout our survey—directors view labor market forces, and thus the so-called “participation constraint”, as more important than investors, who prioritize the “incentive constraint”. Only 1% of directors and 5% of investors view keeping the level of pay down as their primary goal. This is consistent with CEO pay being a small percentage of firm value, while hiring a subpar CEO or providing suboptimal incentives has potentially large effects. (more…)