CEOs and directors don’t necessarily agree on how to evaluate executive performance. Their opinion differs substantially from the public, and that can introduce risk into the equation.

In their survey of CEOs and directors of Fortune 500 companies “CEOs and Directors on Pay: 2016 Survey on CEO Compensation,” Stanford University’s Rock Center for Corporate Governance and Chicago-based executive search firm Heidrick & Struggles found that, while 76 percent of CEOs and directors believe that CEOs are paid correctly — based on the expected value of compensation awards at the time they’re granted — not so the American public, which sees CEOs as overpaid and in need of pay cuts.

The dichotomy introduces an element of risk as “public outrage over CEO pay invites legislative or regulatory intervention,” according to Nick Donatiello, lecturer in corporate governance at Stanford Graduate School of Business. Donatiello wrote in the paper, “Directors need to make the case clearly and convincingly that the pay they offer is not only tied to performance but that it is deserved based on market realities, performance, and the CEO contribution to that performance.”

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