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]


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.


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


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.


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.

Eric M. Jones

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.



> 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?

Avi Rappoport

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.


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".

trader n

One should compare the pay of CEOs at public vs. private companies. CEOs of public companies can take advantage of the fact that their compensation is distributed as an expense over many shareholders.

In addition, if an executive is paid in stock options, it is the same as if they were paid in cash - as far as the expense to the shareholders is concerned.

But being paid in stock options makes it look as if the compensation is incentive driven, when the reality is that the price of a stock is to a large extent driven by the market for equities (as opposed to CEO performance).


Pass a law tying the lowest-paid employee's salary to the highest-paid: the top salary can only be 100x as much as the lowest salary. Wanna pay your new CEO 10 million dollars? Fine, but then the entry-level assistants get 100K.

We'd figure out pretty quick which employees are really considered essential.


The idea that one must pay top-dollar in order to retain top talent, assumes it's possible to know exactly who is "top talent." In a lot of cases, corporate boards assume that people are talented, but in fact they make no effort to measure their talent.

Take a company that's had a CEO for several years. They may decide to give him a fat bonus to keep him ... but they are assuming -- without having any evidence to support the idea -- that he's worth keeping. For all they know, there are other, MORE talented potential CEOs out there. (This is true even if a company is doing well financially ... it's always possible it could be doing even better.) But they don't look at any other people for the job, they just assume the CEO they have, is more talented than anyone else.

So long as corporate boards never conduct any "talent comparisons," the idea that they have to "pay for talent," is specious right at the outset.



CEOs make more than me. This is unfair, since it is an affront to me that anyone else is considered more valuable than I am.


So, if I get this right, companies trying to "Keep up with the Jones' " salaries isn't greed?

I beg to differ.


Many of you are missing the point. If CEO X is better than the next alternative by 1% (i.e. not by much), that may turn profit of $1 billion into profit of $1.01 billion, for an increase of $10 million. If he captures much of that as pay, it makes perfect sense. To say that a CEO must be 10 times as good to deserve 10 times the pay is simply incorrect. As for -E's comment, the CEO is far more valuable for a firm than an assistant, as the residents in countries that reject that claim painfully learned (USSR e.g.). As for Avi, if a founder has a huge number of shares (Jobs) then he has a stake in the game and need not be paid much extra. But would you favor giving a new CEO a billion $ in shares so that he need not be paid more in the future? Pay may be oddly set, and I agree that compensation consultants have hijacked the system, but the arguments by readers above are surprisingly poorly thought out.


Where's the outrage?

Yeah, but nobody seems to care that marginally-talented singers, actors, athletes, and even journalists are paid those kinds of sums. Why only outrage over CEO pay? At least CEOs are trying to run companies that create jobs and innovative products. Are Tom Cruise, Kelly Clarkson or Katie Couric really worth it?

David Jefferys

Au contraire, Ed # 14. The problem isn't that a good CEO shouldn't receive a nice cut of the profits over and above what an average CEO would produce, it's that a poor CEO who drives the company into the ground still reaps huge rewards.

Even assuming your argument has merit, why would a rational shareholder give up "much" of the profit imputed to the CEO's skill (and again, most of the critiques above dwell on the complete lack of a yardstick for CEO skills), reducing the dividends available to himself?


The benefit of a great CEO vs. an average one comes from their ability to:
1. lead other people in a direction that they don't necessarily want to go (not an easy skill to acquire)
2. make the *right* decisions for the strategic growth or direction of the company (and making the right decisions at a macro level, which is hard to get right time and time again.)

A great CEO is worth their weight in gold.


Do we actually know how employees at different levels contribute to the value of the company? My problem with high levels of compensation for CEOs of companies that are in trouble is that CEOs don't face proportional losses to those that lower-level employees face, even when those lower-level employees may be essential to the day-to-day operations that ensure cash flow or smooth production. (A $40,000-per-year employee who's been laid off is much worse off than a CEO that receives multimillion-dollar compensation.)

Certainly bitterness toward CEOs in the current economy is partly because very highly paid CEOs have received enough money in one year of compensation to live well for a lifetime according to the values of many employees that are working for less than $100,000 a year.

Yes, the worth of a great CEO is remarkable. But the worth of an average CEO is more problematic. The worth of athletes and entertainers is also problematic as far as I am concerned.

How much value is squandered by companies that rely on the CEO and ignore input from lower-ranking employees who could improve the performance of the company?


Pranjali Chanchani

The high compensation paid to a CEO reminds me of the 'tournament model' where the winner gets paid much more than the person coming in second.
This is to inspire everyone on the lower rung to try and get to the top and probably not so much for the "high talent" of the CEO.
This policy helps the firm gain in the overall picture as everyone in the lower rung will be vying for the CEO's job and working that much harder for it increasing their individual contributions to the firm's profits.

Paul Dong

I think the idea behind this high compensation is the difference between two markets. One is market for skills, the other is for entrepreneurship.

While skills may be proved by certificates and past projects, entrepreneurship is hard to evaluate. Therefore people with record (even bad record) and experience seem like a safer bet than rookies to the job.

With this high barrier of entry, no wonder the CEOs can pocket the doughs.