CEO skill and excessive pay: a breakdown in corporate governance?(HEADLINE)(chief executive officer)

What do Disney, AT&T, Exxon and Verizon have in common? Based on economic performance and what they pan their CEOs from 1991-2002, a new academic study argues that all these firms were headed by CEOs who were paid too much.

These firms, say the researchers, are among a group of companies headed by CEOs whose pay is negatively related to job skill: The CEOs seem to be rewarded--in most cases, quite amply--for their bad performance. Disney's Michael Eisner, for example, was pan $38 million above the industry average when for three out of six years the company's performance actually declined in relation to other firms in the entertainment industry.

"Lately there have been legitimate concerns about CEO pay," san Stanford Professor Robert Daines. In 1992, the average CEO of an S&P 500 firm earned $2.7 million. By 2000, average pay for these CEOs had increased more than 400 percent, to more than $14 million. When compared to the pay of average workers, the increase is even more dramatic: In 1992, CEOs were paid 82 times the average of blue-collar workers; in 2004, they were paid more than 400 times those salaries.

"Barry Bonds makes a lot of money because he's a great baseball player. In general, the best-paid players are also the most skilled," said Daines. "The main question is: Is the CEO labor market working in the same way? Do you make more money if you are better at it? Or is the market for CEO pay broken, in that CEOs receive high pay for something besides skill--like having friends on the board?"

Daines, the Pritzker Professor of Law and Business in the School of Law, who holds a courtesy appointment at the Business School, studied the relationship of executive pay to executive skill. In a recent paper, he and colleagues from the University of Pennsylvania and New York University concluded that particularly in big firms, a high salary doesn't necessarily mean that a CEO is more competent than his or her peers.

The question first arose when Stanford Law School was doing a search for a new dean. Some faculty members wondered whether the choice of dean actually made a difference to the institution's performance. "We wondered: Maybe the school will do roughly as well, no matter who is chosen as dean," said Daines, adding it was a natural step from that question to ask whether individual CEOs mattered to the companies they lead.

First, the researchers defined a way to measure CEO skill. Although many studies have examined the relationship between CEO pay and company performance, Daines and his colleagues wanted to isolate specific evidence of executive competence. After all, company performance can depend on a number of factors beyond the power of an individual CEO: the economy, regulatory constraints, or industry conditions, to name just a few.