Study Busts Myth Corporations use to Justify Skyrocketing CEO Pay

Rebecca Leber
Think Progress / News Report
Published: Monday 24 September 2012
“It is increasingly apparent that the pay awarded to chief executives is becoming profoundly detached from not just the pay of the average worker, but also from the companies they run.”
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CEO pay has increased 725 percent over three decades, while worker pay has essentially remained flat. A new study challenges a conventional practice corporations use to justify skyrocketing CEO pay, which is that without it, CEOs would leave for competitors. According to the study by the University of Delaware’s Charles M. Elson and Craig K. Ferrere:

It is increasingly apparent that the pay awarded to chief executives is becoming profoundly detached from not just the pay of the average worker, but also from the companies they run. Offsetting the external focus, which is so heavily relied upon today, with internal metrics and internal benchmarking may help to curb the persistent escalation. We hope that if directors are no longer constrained by notions of “competitive” pay, which are driven by the false belief that CEOs are interchangeable, they may have the space to rationalize the upward spiraling pay ratchet and deliver what is more shareholder acceptable compensation.

Company boards rely on a practice where they use loosely defined “peer groups” of supposedly similar companies to set the CEO’s compensation. In reality, few CEOs leave one company for another: Of 1,800 CEO successions between 1993-2005, less than 2 percent had held the position at a competing firm. Their skills, highly specific to the company, are not easily transferrable.

Another issue is the “peer groups” companies use is so loosely defined that it includes firms that are much larger or aren’t in the same industry, much less rivals. In other words, the CEO of IBM is unlikely to jump to AT&T, Ford or Pfizer, even though those companies’ CEOs are included in IBM’s peer group.

A recent example may include Best Buy, which offered its new CEO a three-year compensation package of $32 million, after laying off 2,400 employees this summer. A company spokes woman defended CEO Hubert Joly’s pay as “in-line with best practice for Fortune 50 companies,” and “is squarely in the mid-range for a CEO of a company the size of Best Buy.”

It’s a false paradox,,” study co-author Elson told the New York Times. “The peer group is based on the theory of transferability of talent. But we found that C.E.O. skills are very firm-specific. C.E.O.’s don’t move very often, but when they do, they’re flops.”



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6 comments on "Study Busts Myth Corporations use to Justify Skyrocketing CEO Pay"

jgminnesota

September 24, 2012 6:10pm

I don't have stock in Best Buy, but if I did I would sell now. Who is sitting on the Boards of these companies that approve these insane CEO salaries? Layoff 2,400 employees then hire a new CEO for $32 million? That is not only demoralizing to the people laid off, but to the employees remaining also. Extremely poor judgement by a once proud MN company.

pitch1934

September 24, 2012 5:44pm

Aren't these Fortune 500 boards and others also staffed by people who vote for your salary, and you inturn sit on their boards and vote for their salaries.

William Bednarz

September 24, 2012 12:45pm

GREED - Which is exactly why corporations no longer give their employee's healthcare - - - that is of-course excluding the CEO's
BUT STUPID STOCK HOLDERS GO ALONG WITH IT - NEVER LOOKING AT WHERE THE MONEY COMES FROM......including bonuses

clefman

September 24, 2012 12:28pm

The man has never lived who is worth $32 million anything. This is merely one over-inflated corporation trying to look more bloated than the next.
We've allowed sick jokes like this to rise out of a valueless society that has awarded us with today's congress and dysfunctional government. Perhaps we need to question the basic tenets of our nation's pledge.

anono

September 24, 2012 11:19am

CEO in the acronym for 'Do less but get paid more'. At $32 million a year best buy's Hubert Joly falls in the 'job creator?' class, which finally gives us a defined view of what being a "job creator?" actually means. "The more folks I fire makes my salary go higher!" "So then the more I make for me the less I should have to pay!". Hence Gee WHiz's tax cuts for the 'self-wealth creators'. So in the real world, the cancervatives argument is that tax cuts for the self-wealth creating job destroyers will help the economy by putting people back to work by laying them off. You don't need to be Spock to see the obvious there.

oldhat

September 24, 2012 10:49am

peer review is self feeding tim raises joe salary so tim needs raise to stay in line