A Comparison of CEO Pay in Public and Private US Firms

Abstract

We provide a comprehensive comparison of CEO pay in public and private US firms over the period 1999 through 2008. The main difference between public and private firms is the existence for public firms of an active market for the firm’s shares. Consistent with the predictions of the optimal contracting models in which both managers and shareholders can trade in public equity markets we show that the structure of annual pay in public firms contains significant equity-based incentives, while private firms rely more on salary and bonus. Despite the larger amounts of equity-based pay, however, public firm CEOs have lower overall portfolio incentives. Additionally, pay in public firms is positively related to both accounting and stock price performance, while private firm pay is basically unrelated to firm performance. We also show that, all else equal, public firm CEOs earn an 18% pay premium over private firm CEOs—a result that appear to be driven by labor market segmentation between public and private firms. Finally, when firms transition from private to public status, we find that both the structure and level of pay change significantly in ways that corroborate our findings from the cross-section.

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