In the mythology that surrounds executive compensation, unchecked executives collect unearned rewards and grow rich at the expense of shareholders, employees, and the broader community. The media's fascination with renegade executives and their boards has overshadowed evidence that realizable executive pay is highly sensitive to corporate performance and that boards act decisively when financial results are unacceptable. We hope the account provided will reset the terms of the debate so that constructive discussions about executive compensation and the U.S. corporate model can flourish.

The process for setting executive pay at the vast majority of companies follows the principles of pay-for-performance and complies with the extensive set of laws and regulations governing executive pay practices and the role of the board of directors. The same force that sets pay opportunity for all Americans determines CEO pay: relatively free, if imperfect, labor markets, in which companies offer the levels of compensation necessary to attract and retain the employees who generate value for shareholders. The problem is not that CEOs receive too much performance-driven stock-based compensation but that nonexecutives receive too little.

The issue should not be the dollar amount paid to U.S. CEOs – or how that amount compares with pay levels in other countries or whether it represents high or low multiples of pay for the average worker. The first and last question must be whether the CEO creates an adequate return on the company's investment.