Current executive pay model is fair and crucial to the health of industries

September 10, 2008

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WASHINGTON—The “pay-for-performance” model that determines executive pay is crucial for the viability of companies and the health of the U.S. economy, finds a study released by the Cato Institute.

“The economic slowdown and active political season are generating calls for imposing new regulations on executive pay. This push for overregulation, which is driven by misperceptions about the labor market for executive talent, is unfortunate because the current competitive system has helped fuel business growth and created a wealth of economic opportunities,” say the authors of “Executive Pay: Regulation vs. Market Competition.”

In the study, Ira T. Kay, global practice director of executive compensation consulting at Watson Wyatt Worldwide, and Steven Van Putten, a leader of Watson Wyatt’s executive compensation consulting practice, examine the process that boards use to determine pay packages, including supply and demand and the incentive payouts that are generally determined by performance. The findings reveal that corporate pay is generally fair and justified. 

The authors lament that the U.S. labor market for corporate executives is an unfortunate exception to the general U.S. policy of minimizing labor market regulation. “Critics have argued that the labor market for executives does not reflect supply and demand for executive talent, and that executives essentially set their own pay through power over their board of directors. We refer to this view as the ‘myth of managerial power.’”

The authors conclude: “The U.S. corporate model that has generated so much wealth for American citizens will be seriously damaged if we take away or severely restrict the system of risks and rewards that attracts talented executives and pays them to make the right decisions on a sustained basis.”

This report can be found at: http://www.cato.org/pub_display.php?pub_id=9621