Surreal cityscape with a giant salary check overshadowing shareholders.

Are CEOs Overpaid? Unpacking Corporate Governance and Executive Compensation

Kai Mendoza in Business & Economy August 2025 • 4 min read.

"A deep dive into how ownership, board structure, and governance policies impact CEO pay in companies around the world."

Executive compensation has always been a hot topic, sparking debates about fairness, economic disparities, and whether top executives truly earn their hefty paychecks. In today's world, where income inequality is increasingly scrutinized, understanding how CEO compensation is determined is more critical than ever.

The process of setting CEO compensation is complex, involving numerous stakeholders and influenced by a variety of factors. Boards of directors, compensation committees, and shareholders all play a role, but the ultimate outcome can be affected by everything from company performance to the structure of corporate ownership.

While standard governance models often aim to align executive interests with those of shareholders, they may not always be effective, especially in companies with dominant owners. This article delves into the multifaceted world of CEO compensation, corporate governance, and ownership structures, offering insights into the dynamics that shape executive pay.

The Forces Behind CEO Compensation

Surreal cityscape with a giant salary check overshadowing shareholders.

Several key elements come into play when determining CEO compensation. Traditional governance structures emphasize the importance of board composition, the presence of independent directors, and the establishment of compensation committees. These mechanisms are designed to ensure that CEO pay is aligned with company performance and shareholder interests.

However, the effectiveness of these structures can vary significantly depending on the ownership model of the company. In companies with dispersed ownership, where no single entity controls a large percentage of shares, boards and compensation committees tend to have more influence. In contrast, companies with concentrated ownership often see dominant shareholders wielding considerable power, potentially overshadowing the role of independent oversight.

Board Composition: The balance of independent versus inside directors affects oversight.
Compensation Committees: These committees are meant to bring objectivity to evaluation.
Ownership Structure: Concentrated versus dispersed ownership changes the power dynamics.
Governance Policies: Formal guidelines aim to align CEO incentives with shareholder value.

Emerging research suggests that uniform governance structures may not be equally effective across different ownership categories. For instance, in family-owned businesses, the identity and influence of the dominant family members can significantly impact CEO compensation decisions, sometimes leading to outcomes that deviate from standard governance principles.

Toward Fairer Executive Compensation

As debates surrounding CEO compensation continue, it's clear that a nuanced understanding of corporate governance, ownership structures, and ethical considerations is essential. By promoting transparency, empowering minority shareholders, and fostering independent oversight, we can strive for fairer and more equitable executive compensation practices that benefit all stakeholders.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: 10.2139/ssrn.2975677, Alternate LINK

Title: Ownership Contingent Influence Of Governance Structure On Ceo Compensation: Need For Change In Governance Paradigm

Journal: SSRN Electronic Journal

Publisher: Elsevier BV

Authors: Bala N. Balasubramanian, Samir Kumar Barua

Published: 2017-01-01

Everything You Need To Know

What key factors influence how CEO compensation is determined?

CEO compensation is determined through a complex interplay of factors. Traditional governance structures emphasize the role of the board of directors, particularly independent directors, and the compensation committees they establish. These mechanisms aim to align CEO pay with both company performance and the interests of shareholders. However, the ownership structure of the company, whether dispersed or concentrated, can significantly impact the effectiveness of these structures.

How does corporate governance affect executive pay?

Corporate governance impacts CEO compensation by establishing frameworks and policies that guide how executives are paid. These governance policies often involve board composition, independent directors, and compensation committees designed to ensure objectivity. The goal is to align CEO incentives with shareholder value and company performance. However, the effectiveness of these policies can vary based on the ownership structure of the company, particularly in family-owned or companies with dominant shareholders.

In what ways does the ownership structure of a company impact CEO compensation?

Ownership structure plays a crucial role in shaping CEO compensation. In companies with dispersed ownership, the boards and compensation committees typically have more influence in determining executive pay. However, in companies with concentrated ownership, dominant shareholders can wield considerable power, potentially overshadowing independent oversight. Family-owned businesses, for example, may see CEO compensation decisions influenced by the family's identity and preferences, deviating from standard governance principles.

What mechanisms are designed to align CEO incentives with shareholder value, and how effective are they?

Several mechanisms are designed to align CEO incentives with shareholder value. These include having a strong, independent board of directors, establishing compensation committees that bring objectivity to the evaluation process, and implementing formal governance policies that tie CEO pay to company performance. Transparency in executive compensation practices and empowering minority shareholders are also essential for ensuring fairness and equitable outcomes. However, there are other non-financial factors that contribute to long-term value creation that are not measured.

What steps can be taken to promote fairer and more equitable executive compensation practices?

To move towards fairer executive compensation, several steps can be taken. Promoting transparency in compensation practices, empowering minority shareholders, and fostering independent oversight are crucial. This involves ensuring that boards of directors are composed of independent members who can objectively evaluate CEO performance and compensation. Ethical considerations should also be integrated into compensation decisions, aligning executive pay with the long-term interests of all stakeholders, not just shareholders. Creating an open dialogue, inviting feedback at multiple levels, and using surveys to evaluate the compensation strategies could be considered. Connecting the companies' mission to goals that drive compensation is also an approach to consider.