C.E.O. Pay: Blame It on the Next Guy

Recent studies suggest that exorbitant C.E.O. compensation isn’t primarily produced by greed or even the need to compensate invaluable talent, but rather firms benchmarking C.E.O. pay against other firms’ pay. That’s what Ray Fisman writes in Slate. One prominent C.E.O.’s raise therefore sends ripples of pay hikes through competing companies. [%comments]

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  1. mfw13 says:

    I think it also has to do with corporate boards overestimating the marginal utility of CEO’s.

    We always hear the argument that “we need to pay top dollar to attract top talent”, but do you really? Is the CEO really 100 times more talented than the mid-level manager who makes 1% of the CEO’s salary?

    If you argued that CEOs are 2-3 times more talented than the average person a lot of people might agree with you, but the problem is that the pay scale has gotten way out of whack with marginal utility.

    Corporate governance needs a statistic like baseball’s VORP (Value Over Replacement Player) to measure CEO value.

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  2. frankenduf says:

    well, at this point no one on the planet believes that it’s the “need to compensate invaluable talent” (unless invaluable is read literally)- indeed, running a company into bankruptcy does not even afford termination- one can only speculate on the level of corruption/collusion in corporate oligarchys to explain the ubiquitous ubercompensation of executives as compared to the labor force

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  3. MKF says:

    Big time corporate CEO pay is insane. Not only do these worthless, corporate-speak bablers not deserve their wildly out of whack pay rates, but they accept these huge salaries with NO risk.

    They can drive their company into ruin and still leave with huge severence packages.

    To become a CEO of a Fortune 100 company is to win the lottery. And most of them are as talented as your average lottery winner.

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  4. Rich says:

    You are CEO at # 2 firm in a field.
    You hire a “consultant” to tell your compensation committee that you are underpaid relative to # 1 company “we have to pay as much as them to get the best people”.

    The SAME consultant is then hired by CEO at the # 1 company. His report says “this firm is 30% bigger than the competition, but pay is equal. Therefore we must give our CEO a 30 % increase”.

    Same consultant then gets paid by CEO of # 3 company.

    And the next year … go around again.

    This started in the 1980′s and was well known by the CEO’s and the consultants.
    And continues to this day.

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  5. Eric M. Jones says:

    I admit I am baffled as to how a certain ilk gets promoted. I have written on these pages some of the tales of “CEO’s I have known”. Basically people who failed upwards due to some unfathomable characteristic, along with narcissistic personality disorder.”. As Dilbert says, “Well, s/he can’t write code, s/he can’t design a network, and s/he doesn’t have any sales skill. But s/he has very good hair…”.

    Now I have to be fair. I have known some extremely good people at the top, but they seem oddly rare. More typical is a CEO with an amazing resume….and nobody asks, “Why has s/he had so many jobs? I the resume even true? We’d better not check!” One particular CEO was foisted upon a company I worked for and nearly destroyed it. I lost a $100 bet that s/he would be gone within six months. S/he survived 199 days. I followed their career through the internet where the next company celebrated their coming. …and s/he was gone in six months. Then ANOTHER company did exactly the same thing!

    An executive-recruiter friend of mine say that the VP-title, even if s/he ran several companies in a row into the ground, will get you another six-figure job far easier than outstanding performance in any lower position will get you a five-figure job.

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  6. blue92 says:

    > I think it also has to do with corporate boards overestimating the marginal utility of CEO’s.

    Yes… which is mostly a trend of over-inflated self-assessment.

    So long as the board of one company is composed of CEOs from other companies, there is an obvious incentive to continually raise the compensation bar. In absence of mandated salary caps, quid pro quo will be a dominating factor. Where’s the mystery?

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  7. Avi Rappoport says:

    The top talent argument never worked for me. There are brilliant leaders, like Steve Jobs, but most of his compensation is in stock (and fame). Someone outstanding like that is obvious to everyone around, and it makes sense to compensate them a whole lot.

    But most CEOs are more lucky than skilled, as are most board members. So it’s easy for them to all congratulate each other and pay for the “best”. Such a crock. Give them stock from the day they started, and never reprice it. The company goes down, they should go down with it.

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  8. jerryork says:

    CEO for company A is set by the board of directors. Each of whom is the CEO of other companies. Each of these individuals compensation package is set by their Board of Directors. On which, sits the CEO for company A as a board member.

    Everyone is equally convinced of their “need to compensate invaluable talent”. This seems to be the ultimate “entitlement”.

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