Editore"s Note
Tilting at Windmills

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December 12, 2004
By: Kevin Drum

MORE ON EXECUTIVE COMPENSATION....As Matt says, although tax and accounting issues are worth looking at, the real cause of runaway CEO compensation is widespread corruption in the corporate governance sphere. CEO salaries are essentially set by other CEOs and a small coterie of "compensation consultants," all of whom are motivated to set each other's salaries as high as possible so that in turn their own salaries will someday be set even higher. How many other employees have a sweet deal like that?

So how do they get away with it? First, by convincing everyone that this is a reasonable statement: "If we want a good CEO, we have to pay above the average." Simple arithmetic tells you that as long as everyone believes this, executive salaries will spiral upward endlessly.

Second, by making it hard to figure out how much their executives are paid in the first place. Stock options, perks, lucrative pension plans, and so forth are hard to value, and thus prevent overpaid CEOs from seeming overpaid until it's too late.

And third, by putting up roadblocks that make it difficult for dissident shareholders to complain about all this. In most companies, shares are so widely dispersed that very few people have a strong enough interest in this stuff to make a fuss. And when someone does manage to make a fuss, most corporations have rules that make it all but impossible to gather enough votes to make a difference.

Of course, I guess there are other possibilities. Price levels are controlled by supply and demand, and perhaps there's a shortage of talented CEOs these days. Or perhaps demand is higher. Or maybe companies are better run than they used to be.

If any of those things were true, it would mean rising CEO compensation is just evidence of the market at work. As it turns out, though, none of them are.

CEOs aren't paid astronomical salaries because of market forces. They're paid astronomical salaries because they can get away with it. That's all.

Kevin Drum 6:14 PM Permalink | Trackbacks

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