Mark Gritter (markgritter) wrote,
Mark Gritter


This Slate article on CEO pay reports on research which suggests the spiral of increasing CEO compensation is caused by a slight bias in favor of above-average peers. Compensation committees look at pay at corporations in similar markets and of similar sizes in order to decide what to offer their own CEO. Two economists who looked at the public reports from these committees (mandated since 2006) suggest that the bias towards overcompensated peers accounts for about a 5% boost in average pay per cycle.

I think this isn't the whole story, though. Many corporations use the same techniques to set pay all the way down the pay scale. (Sun certainly did.) Yet somehow this process avoids the same escalation.

The incentives to "get it right" are different by orders of magnitude. Overpaying your CEO by 5% is a few hundred thousand dollars for an average-sized corporation. ($400K for the corporations they looked at.) Increase your entire payroll by the same fraction and you're seriously affecting cash flow.

There's also much stronger incentives "not to get it wrong" on the CEO side. A public pay dispute is embarassing; a CEO jumping ship is headline news. If you underpay your employees there's some long-term attrition but the pool is larger and there's less fuss.
Tags: economics
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