Abstract
We survey directors and investors on the objectives, constraints, and determinants of CEO pay. 67% of directors would sacrifice shareholder value to avoid controversy on CEO pay, implying they face significant constraints other than participation and incentive compatibility. These constraints lead to lower pay levels and more one-size-fits-all structures. Shareholders are the main source of constraints, suggesting that directors and investors disagree on how to maximize shareholder value. Both directors and investors believe intrinsic motivation and reputation to be stronger motivators than incentive pay. Fairness is a significant determinant of pay. One reference point is shareholder returns; it is deemed fair for CEOs to share external risks in contrast to optimal risk-sharing. A second is the CEO’s perception of her value creation; it is deemed fair to recognize good performance even though she does not need additional consumption. The need to provide “recognition incentives” explains why flow pay response to performance, even though CEOs have substantial “consumption incentives” from their equity holdings.