“Compensation theory says that in order for compensation to be effective, you need to create a compensation package in a way that facilitates an alignment between the goals of the executive and the specific goals of the corporation,” Gallani explains.īut when Gallani examined the public records of public companies in the United States, she realized some disconnect between economic theory and economic reality. Among economic scholars, there’s a whole line of theoretical research dedicated to striking that balance. Ideally, the compensation package motivates the CEO to make decisions that benefit both the executive and the company. Interlocking directorates may be one reason CEO compensation packages That compensation includes a vast array of factors, such as salary, bonuses, stock options, and long-term incentive payouts. Among the 350 top firms (by sales) in the United States, the average CEO compensation package added up to $15.2 million in 2013, according to the Economic Policy Institute. And I always wondered, what do they talk about? What is the information they use? What are the questions they ask? And more specifically, what are the sources of influence on the decisions that they make?”Īt large public companies, boards of directors are usually in charge of how and what to pay their CEOs. “For years I imagined this group of people sitting around a table, having to make very important decisions, such as defining the CEO’s compensation package. “There’s always been this black box surrounding what happens in the boardroom,” says Gallani, an assistant professor in the Accounting and Management unit at Harvard Business School. The answer could help to explain why CEO salaries tend to be very high across the board. That’s the main question Susanna Gallani pursues in her working paper Through the Grapevine: Network Effects on the Design of Executive Compensation Contracts. Why, then, do so many executive compensation packages look so similar to each other? “Many of them stated that the design of the CEO compensation package was heavily reliant on the proposals produced by the compensation consultant” Consequently, it stands to reason that the chief executive’s compensation package should be uniquely designed to align to those goals, while addressing the individual goals of the CEO. It stands to reason that every major company has a unique set of strategic goals.

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