Academic research meets practice: why controversial results are not controversial

Purpose This paper aims to explore some of the practical challenges boards face in setting chief executive officer (CEO) pay to show why the failure to see considerable overlap between pay and performance may not be due to poor governance. Design/methodology/approach This paper critically explores the different types of pay reported in public sources (actual vs realized) and the types of performance measures used in CEO pay research. This paper then conceptually reviews the broader governance responsibility of boards, particularly the hiring and firing of CEOs and the impact these decisions have on CEO pay. Findings The authors suggest that much of the lack of overlap between pay and performance may be because of misaligned timing of the pay and performance measures, differences between internally promoted and externally hired CEOs and severance packages of fired CEOs. They conclude that the lack of overlap may not signal failure on the part of boards, but rather may reflect the risk and uncertainty those boards face in hiring and firing of CEOs. Research limitations/implications The analysis shows how using publicly available sources of pay and performance data ignores the practical challenges that boards face in setting pay, and suggests greater care be given to future research purporting to show that boards are failing in their governance responsibilities. Practical implications CEO pay may not be as misaligned with performance as many researchers conclude, but may be due to the risks and uncertainty inherent in governance. Social implications The distributive justice critique of CEO pay may not be valid. Originality/value As opposed to simply mining public databases, this paper more accurately describes some of the variables that impact how boards set CEO pay.