CEO pay, if they appoint the board

TheGrandmaster Economism: Bad Economics and the Rise of Inequality Leave a Comment

Instead, business is a team sport: not only is it impossible to quantify a single leader’s marginal product; it’s hard even to describe it clearly.45 Because no one knows what a CEO is worth, her pay is whatever she can convince her corporation’s board of directors to give her. This is hardly an arm’s-length negotiation, however. The CEO is usually the most powerful person on the board to begin with. In half of Fortune 500 companies, the CEO serves as the chair of the board. Even without that title, a CEO still has disproportionate influence because of her knowledge, her relationships, and the fact that she is difficult to replace quickly. A savvy CEO can recruit allies and place them on the compensation committee, which recommends her compensation package, typically based on an analysis of similar companies—a comparison group that can be weighted toward those with highly paid CEOs. The committee invariably proposes to pay at least as much as the median comparable company, because no board wants to admit that its company has a below-average leader. Some portion of the package will be linked to certain performance targets, but the CEO can encourage the committee to select metrics that will be easy to satisfy.

The economist John Kenneth Galbraith described it perfectly: “The salary of the chief executive of the large corporation is not a market reward for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.”

Leave a Reply

Your email address will not be published. Required fields are marked *