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]
C.E.O. Pay: Blame It on the Next Guy
TAGS: Ray Fisman
and 
. You can also watch it on 
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.
That would be a little more palatable if high paid CEO’s were actually improving the bottomline for shareholders. As we have seen in countless bankruptcies and takeovers..this does not have to be true. Companies should share their success with other company participants who had to carry out the CEO’s plans with possibly more work hours or more education, etc. The exorbatant pay increases for execs went from 35 times workers salaries (1970) to 275 times workers salaries (2007). They pay vastly less taxes than in 1970, but enjoy protection here and abroad of the U.S. military. How many CEO’s have sons or daughters in the military? About as many as congressmen, I’d guess.
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?
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?