Public Release: 

CEO salaries are checked at companies with a powerful shareholder or threat of bankruptcy

Institute for Operations Research and the Management Sciences

LINTHICUM, MD - An analysis of CEO salaries in bull and bear markets shows that the most effective checks on profligate executives are a major shareholder's takeover threat, a looming bankruptcy, or a relatively small Board of Directors whose members own company stock, according to a study in a journal of the Institute for Operations Research and the Management Sciences (INFORMS®).

"Despite media scrutiny and a shaky economy, CEO salaries and compensation are not declining," says Praveen Kumar of the University of Houston's Bauer College of Business. "Our model shows what stops big raises: There is a threshold level of poor performance, and CEO's equity compensation is only restricted when performance falls below that level.

"The threat of imminent bankruptcy focuses the attention of every corporation. The fact that a company's books will be thrown open to creditors and the public is sobering. Just look at the energy sector, which is witnessing rough times. Recent figures shows that while 23 CEOs here in Houston had a compensation exceeding $10 million in 1999-2000, only 13 CEOs have compensation exceeding $10 million in 2000-2001."

The study, "Corporate Governance, Takeovers, and Top-Management Compensation: Theory and Evidence" is by Prof. Kumar; Sok-Hyon Kang, of George Washington University; and the late Richard M. Cyert of Carnegie Mellon University. It appears in the journal Management Science, an INFORMS publication. A summary of the study can be found online at

Key Factors

The study uses operations research techniques to analyze data not only from Fortune 500 companies but small and medium companies as well.

One finding is that the type of Board of Directors most likely to challenge a CEO seeking greater equity in the company is a mid-sized board with around eight members whose majority has a stake in the company. Stock ownership is more influential than board size, the authors find.

Powerful opposition helps. The model shows that a CEO's equity compensation is negatively related to the fraction of the firm held by the largest external shareholder who poses a takeover threat to managerial control.

The prominent role of the largest shareholder's ownership applies even after the researchers control for size, other indicators of CEO power (such as the CEO's share ownership, board structure, and CEO tenure) and industry effects.

The data shows that a CEO is expected to receive about 12% less in equity compensation and about 14% less in total discretionary compensation if the largest shareholder's ownership is twice that of an otherwise similar firm.


The authors tested their predictions on executive compensation data of 1,648 large and small firms, and found considerable support for the predictions.

Executive compensation and ownership data are compiled from proxy statements, obtained through a mail request to all U.S. public firms traded on the NYSE, AMEX, or NASDAQ National Market System, and listed in the DISCLOSURE database and in 1993 COMPUSTAT primary, secondary, tertiary, and full coverage files. The authors updated the data in their contact with the firms.

The authors find that cash bonuses were awarded by 69% of the firms, and when they were awarded, they added about 75% to the base salary.

In the sample studied, mean ownership of the largest non-CEO equity holder is about 17.2%, whereas the ownership when the CEO is the largest shareholder (26.2% of the case) is 24.3%. On average, a typical CEO holds about 8% of the firm's equity, while the median stock ownership is about 2.3%. The average CEO examined in the study is 55 years old, has served as CEO for about 8 years, and has held directorship for about 12 years. The CEO is board chairperson for about 70% of the firms.

The statistics for the Board of Directors indicate that more than half of the U.S. public firms' boards have greater than eight members, the upper bound recommended by two influential studies. Compensation committees, typically consisting of three to four directors, have mean share ownership of about 4.6%. The middle half of the compensation committees hold somewhere between 0.07% to 3.80% of the firm. On average, about 67% of the Board of Directors is occupied by outside directors whose mean and median shareholdings are 5.11% and 1.17%, respectively.


The Institute for Operations Research and the Management Sciences (INFORMS®) is an international scientific society with over 10,000 members dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work in business, government, and academia. They are represented in fields as diverse as airlines, health care, law enforcement, the military, the stock market, and telecommunications. 2002 is the 50th anniversary of organized operations research in the United States. 1952 was the year that the journal Operations Research and the Operations Research Society of America, one of the founding societies of INFORMS, were born. The INFORMS website is at .

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