Skip to Main Content

Economic Quarterly

Fourth Quarter 2013

Evaluating Executive Compensation Packages

Arantxa Jarque and John Muth

The first step in understanding the incentives provided to chief executive officers (CEOs) of large public firms is to measure their compensation accurately. This is not a straightforward task, as only partial information on compensation contracts is collected systematically (Execucomp, since 1992, for top executives of public U.S. firms). The source for the information is the compensation summary tables that the Securities and Exchange Commission mandates to be included in annual proxy statements. We show how to use this available data, together with stock price data in the Center for Research in Security Prices, to construct a measure of annual income that is based on realized compensation, rather than on the expected value of stock and option grants. We discuss the limitations of the available data to construct this measure and compare it to other measures recently used in the literature. We also propose a counterfactual exercise to project what annual income for CEOs in our sample would have been in different performance scenarios for their firm. We present our estimates of annual income and its sensitivity to performance for the period from 1993 to 2012, with a particular focus on the financial industry since the 2008 financial crisis.

Subscribe to Economic Quarterly

Receive an email notification when Economic Quarterly is posted online:

Subscribe to Economic Quarterly

By submitting this form you agree to the Bank's Terms & Conditions and Privacy Notice.

Phone Icon Contact Us

Lisa Davis (804) 697-8179