Setting CEO Pay – Executive Compensation

In 1980, the average CEO’s compensation was about 42 times what the average worker was paid, and by 2007, CEOs received about 344 times the average worker salary. There’s a debate over whether this ballooning of executive compensation is a failure of corporate governance, evidence of abuse of power, or just a reflection of market forces -- that top CEOs must be paid top dollar, or they’ll take their (presumably irreplaceable) talents to other organizations. But how do companies arrive at these astronomical sums?

In this edition of Smith Business Close-Up with the University of Maryland’s Robert H. Smith School of Business, Michael Faulkender, assistant professor of finance, shares his findings from research into executive compensation practices and how firms decide what to pay their CEOs.

Faulkender’s research focuses on empirical corporate finance, primarily in the areas of capital structure, risk management, corporate, liquidity, and executive compensation. His research has received recognition and awards from top academic journals and he has been awarded a research grant from the FDIC Center for Financial Research, which was accompanied by an appointment to serve as a fellow of the center during the term of the grant. He is a member of the American Finance Association, the Western Finance Association, and the Society of Financial Studies.