Dr. Edward Kim
How is the rate of pay for CEOs determined? That is the complex and multimillion-dollar question—and one that WMU Assistant Professor of Finance Dr. Edward Kim researches.
“Corporations invest significant resources in structuring CEO compensation to ensure executives act in ways that maximize shareholder value,” says Kim. “A well-designed compensation package can incentivize performance and long-term value creation. While CEO pay is formally determined by the board of directors, it results from nuanced negotiations between the executive and the board. Whether CEOs ultimately set their own pay or if competitive market forces drive compensation levels remains an open question in research.”
According to Kim’s research, there is causal evidence that increased CEO bargaining power can lead to significantly higher compensation—up to 50% more in some cases. “While competitive market forces do influence CEO pay, powerful executives can extract substantial financial benefits,” he says.
Yet there are limits to how much a highly qualified CEO can command.
The Inevitable Disclosure Doctrine (IDD), for example, affects CEO bargaining power, as it restricts job mobility by preventing executives from joining competitors if doing so would inevitably lead to the transfer of trade secrets. “In states that recognize IDD, companies can legally block former CEOs from accepting certain positions, even in the absence of explicit noncompete agreements,” says Kim. “By reducing the amount of outside job opportunities, IDD reduces CEOs’ bargaining power.”
And yet, Kim notes that in the aggregate, CEO compensation is on the rise despite the handful of states that recognize IDD and ebbs and flows in the market. “CEO compensation has steadily increased. In 1992, the median CEO compensation for S&P 500 firms was approximately $3 million. By 2022, it had risen to around $7 million,” he notes. However, Kim points out that most of this growth comes from stock-based compensation rather than salary increases. His prediction? “CEO compensation is likely to grow based on historical patterns.”
“CEO pay often attracts criticism,” says Kim. “However, top executives possess highly specialized skills that are valuable in the modern economy, and few people have the experience and skill sets to be a CEO. We need to keep in mind that if CEO compensation were unjustifiably high relative to their contributions, market competition would eventually correct it. Rather than focusing solely on fairness of compensation, I encourage my students to develop valuable skills that enable them to succeed in competitive environments and to identify those things that will set them apart in their job search now and in the future.”