Accounting Papers

Document Type

Journal Article

Date of this Version


Publication Source

Journal of Applied Corporate Finance





Start Page


Last Page





This article addresses four major concerns about the pay of U.S. CEOs: (1) failure to pay for performance; (2) excessive levels of pay; (3) failure to index options and other equity-based pay, resulting in windfalls; and (4) too much unwinding of incentives. The authors' main message is that most if not all of these concerns are exaggerated by the popular tendency to focus on the annual income of CEOs (consisting of salary, bonus, and stock and option grants) while ignoring their existing holdings of company equity.

Taking into account the effect of stock price changes on CEO wealth leads the authors to a number of interesting conclusions. First, the pay-for-performance relationship is strong and has grown significantly in recent years. Second, what may appear as above-normal growth in annual pay levels may be necessary to compensate CEOs for the increased risk associated with their growing level of equity-based incentives. Third, conventional (that is, unindexed) stock and options, when viewed as a combination of market risk and firm-specific risk, may provide an optimal solution to two conflicting demands: shareholders' demand for executive rewards tied to company performance and executives' preference to diversify their wealth. Finally, there is little evidence of widespread CEO unwinding of incentives, and levels of CEO equity ownership in the U.S. remain impressively high.

Copyright/Permission Statement

This is the peer reviewed version of the following article: Core, J. E., Guay, W. R. and Thomas, R. S. (2005), Is U.S. CEO Compensation Broken?. Journal of Applied Corporate Finance, 17: 97–104, which has been published in final form at 10.1111/j.1745-6622.2005.00063.x. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving

Included in

Accounting Commons



Date Posted: 27 November 2017

This document has been peer reviewed.