CEOs are showered with too many goodies. Or, so says an article recently published in the Washington Post that talked about how CEO’s pay is heavily based off of “peer benchmarking” or the pay of CEO’s at similar corporations and not on performance. Also, CEO’s are showered with perks and “goodies” just because the other CEO’s get them. This is done because company boards believe that if they don’t treat their CEO as well as similar CEO’s they might jump ship and leave for another company. However, this is an awful practice and it needs to stop.
The first and most obvious reason that this is a bad practice is that it doesn’t align a CEO’s incentives with the success of the company. In the article, it references Amgen, one of the nations largest Biotech firms, who’s board decided to increase CEO Kevin Sharers salary from 15 million to 21 million last year. This was following a 3% loss of shareholder’s investments and a shrinking of the workforce from 20,100 to 17,400. How can your company be doing so poorly and at the same time you significantly increase your CEO’s salary? Issues with incentives like this were referenced in the Overcoming Short-termism article that we read, when they suggested ways to align incentives with investors to help the economy. We see a severe lack of that with peer benchmarking.
The other problem is salary’s spiraling out of control. When a board looks at another company as a “peer” company to base a CEO’s salary off of, most likely, that peer company’s board is looking at the original company as a peer company as well. So what we see happen is that one company’s board will raise their CEO’s salary higher than their peer in order to make sure their CEO’s stays happy and has “what the other kids have” and, of course, they believe that their CEO is better than the competition. Then, the peer company will raise their CEO’s salary for the same reason, and the cycle continues. Because of this, executive salaries just keep going up. The article sites that “Since the 1970s, median pay for executives at the nation’s largest companies has more than quadrupled, even after adjusting for inflation, according to researchers. Over the same period, pay for a typical non-supervisory worker has dropped more than 10 percent, according to Bureau of Labor statistics.” That statement says it all, this “peer benchmarking” needs to stop.