The Way CEOs Get Paid Is a CrockS

Allow us, please, if you will, to direct your attention to this paper on the topic of Can You Believe How Much Motherfucking Money These CEOs Make, And, Even Worse, How They Try to Justify That Shit As If It's All Good. As noted in Gretchen Morgenson's column yesterday, CEOs and the cronies that justify their salaries are, in most cases, full of shit.

Large corporations justify their CEO's pay package by amassing some peer group of companies, and seeing what they pay their CEOs, and using it as a guideline. It does not take a great deal of mathematical imagination to figure out how this tactic can lead to a neverending upward spiral of salary, as well as a neverending plausible deniability of responsibility for this, by companies themselves. "It's not that they want to give so much of shareholders' money to the boss, you know, but everyone else is, so what can we do? If we don't, he'll take his spectacular talents off to somewhere else that will pay him better."

A new study from researchers at the University of Delaware argues that this whole "peer group" method of salary-setting "creates a market for executives where it otherwise does not exist." They point out:

The reason why executive compensation does not conform to market-­‐based expectations and that alternative institutions are utilized is simple: the necessary skills to successfully run a company cannot be acquired besides through actual experience at the company; therefore, executives are not typically transferable between firms. Hence simple market pricing mechanisms are ineffective.

It's not as if a CEO is not paid "enough" will simply jump ship to another company that will pay him more, because the skills of CEOs tend to be company-specific. The whole threat is a canard designed to justify higher pay. Research shows that CEOs promoted from inside companies tend to do better than those brought in from outside. That means that there is even less justification for worrying about constant musical chairs of CEOs, all chasing higher salaries. They simply wouldn't do well. Add in the inherent uncertainties about how much CEO performance affects the company's bottom line, and it all makes for a pretty fucking compelling argument that CEOs should be paid a lot more like regular (albeit high-ranking) employees, rather than as mystical magical poobahs who must be coddled and swaddled in thick layers of bank notes, lest they take their irreplaceable management abilities off to another firm. The reality is that the CEO probably needs the company more than the company needs him. The company can always promote new managers from within, but the CEO's skills won't necessarily apply to another company, so his golden goose would die if he left. And don't worry too much if a competitor lures your CEO away with a higher paycheck—there's a name for that.

Don't believe the hype.

[Weinberg Center via NYT. Photo of a bunch of overpaid men: AP]