The total pay for CEOs at the new public companies shot up substantially at the time of the IPO and stayed higher, the authors found. These CEOs saw an increase of 245 percent from the year prior to the IPO to the year after, compared with an increase of 32 percent for CEOs in the control group. The gap between the average compensation levels of the two CEO groups should narrow considerably over time if the IPO company remains at about the same size as the control company — but will stay in place if the IPO company grows.
Noteworthy now, however, is how the increases are paid. The CEOs at IPO companies received less than one-third in cash, on average, compared with more than half in cash for the control group. And the proportion of total pay from restricted stock and options increased significantly for the newly public CEOs, soaring from an average of 8 percent before the IPO to about 40 percent in the three succeeding years.
“Overall, the results indicate a significant permanent shift in the level and structure of CEO pay as firms transition from private to public,” the authors write. “The change in pay is largely driven by CEOs being given additional equity incentives to maximize shareholder value.”
The researchers conclude that “[t]he observed public firm pay premium might actually be the result of good governance and stronger links between CEO pay and firm performance.”
Contrary to popular conception, the CEOs of U.S. public firms are not overpaid in comparison with the CEOs of privately held companies. Employing a unique dataset, the authors find that public CEOs earn just under 20 percent more, on average, in total compensation, but only one-fourth of that differential is in cash. The rest is in risk-heavy stock options, effectively leveling the playing field between public and private CEOs.