Martijn Cremers on CEO Pay Slice

K. J. Martijn Cremers, associate professor of finance, and his collaborators have created a new measure, the CEO Pay Slice, that serves as a proxy for the relative importance of the CEO within the hierarchy of a firm. In their paper "The CEO Pay Slice," Cremers, Lucian A. Bebchuk of Harvard Law School, and Urs Peyer of INSEAD examine the relationship between the CEO Pay Slice—the proportion of the total pay for the top five executives at a firm that goes to the CEO—and the performance of firms.

They find that firms where the CEO gets a higher-than-average fraction of the pay for top executives tend to have lower financial value and profitability. These firms are also more likely to see acquisition announcements greeted with a drop in stock price, more likely to grant their CEOs "lucky" stock options on the day of the month with the lowest stock price, and less likely to fire their CEOs after periods of poor performance, suggesting that a high CEO Pay Slice may be associated with poor governance.

Read an earlier version of the paper, titled "CEO Centrality."