TLP: Apparently, It Took Actual Research To Figure This Out
Courtesy of Jr. Deputy Accountant
DealBook has a shocker:
Corporate boards appear to routinely use compensation peer groups to artificially inflate pay for their chief executives, helping to contribute to the cascading increases in executive compensation over the last several years, according to an academic study on corporate governance.
While the rate of pay increases was nearly 11 percent in one recent year, the study highlights one of the various ways that corporate boards go about determining huge compensation packages for executives.
Executive pay has increased substantially over the last few years. For example, in 1965 chief executives at major American companies earned 24 times more than a typical worker, while in 2007 they made 275 times more, according to the Economic Policy Institute. This sharp increase in income for chief executives, coming as wages for ordinary Americans remained relatively flat, has become one of the more perplexing questions in social science and business. Are chief executives that much more valuable now than they were 45 years ago?
Social scientists have looked at a number of reasons for the disparity in pay, with many believing that it has something to do with weak corporate directors simply giving into the demands of management, which are often leading the boards.
The common answer as to why chief executives are paid so much money is that boards want to “retain talent” and fear losing their chief executive to a competitor. Compensation committees on boards hire consultants to advise them on how much other chief executives at rival companies are paid to make sure that they are not undercutting their own top executives.
For the full circle jerk, check out ScienceDirect.
