How to end CEO pay envy
Disclosing every detail of skyrocketing compensation packages is only making a bad situation worse. It's time to go back to keeping the numbers private.
Jeffrey Pfeffer, Business 2.0 Magazine

(Business 2.0 Magazine) - By now, you've probably read some of the infuriating stats: According to a study by the Federal Reserve, American chief executive salaries have ballooned to more than 170 times the average worker's pay, up from 40 times in the 1970s. In Great Britain, that multiplier is just 22; in Japan, it's 11. The median salary for CEOs of the 100 largest U.S. companies hit $17.9 million in 2005, a 25 percent jump over 2004. Workers got a 3 percent raise.

Also by now, you've likely read stories expressing outrage and advocating remedies to help bring executive pay under control. In January, SEC chairman Christopher Cox proposed new rules that would require companies to disclose myriad details of executive compensation packages. Some companies, like Conseco (Research), have begun using "tally sheets" to help boards keep score of pay packages for top execs.

What astounds me is how little anybody seems to have learned from either hard evidence or past experience. Many of the same suggestions--such as providing more transparency in what senior executives receive--have been made before and followed before, and have actually made matters worse.

So as long as everyone else is chiming in, I have my own proposals to help resolve the executive pay conundrum. But compared with most of the ideas floating around, mine have a big advantage. They're based on proven theories of human behavior--not on fashionable public outrage.

1. Reduce disclosure surrounding CEO compensation. In its wisdom, the SEC wants to make even more components of CEO pay public. Have we learned nothing on this issue? More than a decade ago, when SEC-mandated disclosure of pay in proxy statements expanded to include not just salaries and bonuses but also stock options grants, it sparked an arms race among compensation consultants happy to exploit another bargaining chip for their clients. And I've seen no evidence that disclosing the grants and their costs caused the size of those grants to go down.

Nor is disclosure likely to curb indulgent retirement benefits and other perks--like the $84,000 that former Tyson Foods (Research) chairman Donald Tyson received last year to cover "lawn maintenance" at his five estates or the $1 million the company paid to cover his income tax bill.

On the contrary. The minute other CEOs see how poorly they're faring against counterparts like Tyson, you can bet they'll be pushing to get their lawn-mowing bills covered too. Why? In part because every company that wants to stay competitive needs to be able to advertise that it pays its execs as well as the next company.

The transparency trend ignores a simple notion that has helped keep rank-and-file pay in check for decades. People decide whether they are paid well or poorly, and if their company values them sufficiently, through a process of social comparison. If people can't easily compare what they're getting, they're likely to forget about it and get back to work.

That's why most firms keep pay data private, and some even have policies that preclude discussing pay with colleagues. Perhaps this explains why CEO compensation has escalated while salaries for others haven't.

2. Dissolve the free-agent market. Just as overinflated as executive salaries is the notion that CEOs can profoundly affect company performance. Years ago most top execs rose through the ranks and CEO positions were filled from within. The CEO-as-celebrity culture didn't exist.

Today the free-agency market for CEOs and searching outside for miracle workers have jacked up salaries but weakened the link between pay and performance. Don't believe me? Read the sports pages. Free agency in major-league baseball has led to escalating salaries for all players--but is the play any better? Hardly. The point is, free agency tends to escalate wages, regardless of performance.

This may sound almost Zen-like, but the only way to stop the CEO pay boom is to stop writing about it, talking about it, mandating more disclosure of it--and let senior execs go back to doing their jobs.


Business 2.0 columnist Jeffrey Pfeffer is the Thomas D. Dee II Professor of Organizational Behavior at Stanford University's Graduate School of Business. Top of page

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