Private Equity and Executive Compensation

After the financial crisis, Congress directed regulators to enact new rules on CEO pay at public companies. The rules would address the possibility that directors of public companies put managers' interests ahead of shareholders' when setting executive pay. Yet little is known about how CEOs are paid in companies whose directors have undivided loyalty to shareholders. These directors can be found in companies owned by private equity firms-the savvy investors long renowned for their ability to maximize shareholder value. This Article presents the first study of how CEO pay in companies owned by private equity firms differs from CEO pay in public companies. The study finds that directors appointed by private equity firms tie CEO pay much more closely to performance by preventing CEOs from selling, or "unloading," their holdings of the company's stock. My findings suggest that public company boards should also limit unloading to strengthen the CEO pay-performance link. Furthermore, regulators should require public companies to disclose CEO stock holdings prominently. Both current law and post-crisis rulemaking emphasize transparency in pay levels rather than incentives, a focus that perversely encourages directors to weaken the relationship between CEO pay and performance.