The nonsense where board of directors, chock full of CEOs and C-level executives from various companies, set the pay of other CEOs, has long been a pet peeve project here at FMMF. I used to write a lot more stories about the subject but essentially have given up the ghost.
As repeated countless times, if all company employees had their pay determined this way (a board of IT folk at 10 peer companies set the pay packages of the IT department, a board of HR folk at 10 peer companies set the pay packages of the HR department, etc) just about every company would be bankrupt within a few years, as human nature took over. But since it's just the top position where pay is set this way, it's more easily absorbed on the P&L. Therefore, the ratio of CEO pay to common worker bee has exploded from something like 40:1 in the 70s to 300:1 nowadays.
Of course we are not even discussing the signing bonuses, perks, option grants, and 'bonuses' for being fired ... err, to spend more time with the family. Somehow, executives of multinationals in Germany and Japan and other countries are able to lead their companies at far lower pay rates (and ratios versus the worker bees)- but I guess they just are not very talented people.
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The Washington Post (with Bloomberg) takes a look at the country where every public company CEO is 'above average'.
- As the board of Amgen convened at the company’s headquarters in March, chief executive Kevin W. Sharer seemed an unlikely candidate for a raise. Shareholders at the company, one of the nation’s largest biotech firms, had lost 3 percent on their investment in 2010 and 7 percent over the past five years. The company had been forced to close or shrink plants, trimming the workforce from 20,100 to 17,400. And Sharer, a 63-year-old former Navy engineer, was already earning lots of money — about $15 million in the previous year, plus such perks as two corporate jets.
- The board decided to give Sharer more. It boosted his compensation to $21 million annually, a 37 percent increase, according to the company reports. Why? The company board agreed to pay Sharer more than most chief executives in the industry — with a compensation “value closer to the 75th percentile of the peer group,” according to a 2011 regulatory filing.
- This is how it’s done in corporate America. At Amgen and at the vast majority of large U.S. companies, boards aim to pay their executives at levels equal to or above the median for executives at similar companies.
- The idea behind setting executive pay this way, known as “peer benchmarking,” is to keep talented bosses from leaving. But the practice has long been controversial because, as critics have pointed out, if every company tries to keep up with or exceed the median pay for executives, executive compensation will spiral upward, regardless of performance. Few if any corporate boards consider their executive teams to be below average, so the result has become known as the “Lake Wobegon” effect.
- It wasn’t until recently, however, that its pervasiveness and impact on executive pay became clear. Companies have long hid the way they set executive pay, but in late 2006, the Securities and Exchange Commission began compelling companies to disclose the specifics of how they use peer groups to determine executive pay.
- Since then, researchers have found that about 90 percent of major U.S. companies expressly set their executive pay targets at or above the median of their peer group.
Mark's note - Again, think about how this would work in the rank and file - if the 'board of directors' for your IT department said to retain talent the IT folk had to be paid above the median.... and then EVERY public company in America... or at least 90% of them... had the same view, what would happen to IT wages across the country? Then extrapolate that thinking to HR, accounting, sales, marketing, finance, R&D, engineering. Labor costs would overwhelm the company (and all companies competing in this rat race of nonsense) and they'd be going BK. It would be an outrageous concept at the worker bee level - but it is ok in the C-suite.
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