CEOs and directors don’t necessarily agree on how to evaluateexecutive performance. Their opinion differs substantially from thepublic, 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 andChicago-based executive search firm Heidrick & Struggles foundthat, while 76 percent of CEOs and directors believe that CEOs arepaid correctly — based on the expected value of compensation awards at thetime they’re granted — not so the American public, which sees CEOsas overpaid and in need of pay cuts.

The dichotomy introduces an element of risk as “public outrageover CEO pay invites legislative or regulatory intervention,”according to Nick Donatiello, lecturer in corporate governance atStanford Graduate School of Business. Donatiello wrote in thepaper, “Directors need to make the case clearly and convincinglythat the pay they offer is not only tied to performance but that itis deserved based on market realities, performance, and the CEOcontribution to that performance.”

CEOs, unsurprisingly, were more likely than directors, at 84percent compared with 71 percent, to believe that CEO pay isreasonable. However, 25 percent of directors — a “sizable minority”— do not agree.

But both CEOs and directors believe that CEO pay is aligned withthe company’s performance, and 77percent believe that compensation arrangements contain the correctmix of short- and long-term incentives. While there’s not a hugedifference between CEOs and directors on that, 21 percent ofdirectors believe that compensation contracts are too focused onthe short term. Only 3 percent think they’re too long-term.

Corporate leaders focus on CEOs’ contribution to outcomes andthink CEOs are directly responsible for 30 percent of performanceresults. Interestingly, directors give more credit to CEOs than theCEOs do themselves, with the former believing the execs areresponsible for 40 percent and the latter only crediting themselveswith 30 percent.

But CEOs and directors disagree on performance metrics anddiscretionary bonuses, with directors nearly twice as likely asCEOs to cite stock price performance (total shareholder return) asthe single best measure of company performance (51 percent versus26 percent). CEOs, on the other hand, credit profitability measures— operating income and free cash flow — as the best indicators; 49percent of CEOs versus 20 of directors do so.

And while 34 percent of directors see CEO compensation as aproblem (just 12 percent of CEOs do), that doesn’t mean they wantany intervention on the matter. Ninety-seven percent of both CEOsand directors agree that the government should not do anything tochange CEO pay practices. The public, on the other hand, is moretolerant of having someone to step in: 49 percent favor governmentintervention while just 35 percent oppose it.