Vanderbilt Law Review

First Page



One of the most puzzling aspects of executive compensation is the pay gap that exists between American and foreign Chief Executive Officers (CEOs). U.S. CEOs are paid vastly more than their foreign counterparts: they have higher base salaries, they receive larger bonuses, they get more stock options, and they are given bigger chunks of company restricted stock. Commentators and the financial press have been quick to claim that such differences can be explained by "Board Capture," a theory that claims powerful American executives take advantage of weak domestic boards of directors and passive, dispersed shareholders to overpay themselves exorbitantly.

According to Board Capture theorists, American CEOs orchestrate the appointments of their obedient subordinates as inside directors and of friendly, passive outside directors. The net result is a board comprised of compliant directors and a Compensation Committee that lacks the aggressive hard-nosed negotiators needed to keep executive pay in check. To make matters worse, the Compensation Committee's advisors, usually paid consultants from a handful of well-known firms, have conflicts of interest that preclude them from giving truly disinterested advice. They tell directors to rely upon industry surveys of pay levels that have the (un)intended consequence of constantly ratcheting executive pay levels upward.