Why CEOs make so much money

Tuesday, April 28th, 2015

A retired CEO explains why CEOs make so much money — or, rather, why they started making so much more a couple decades ago:

Thank our regulators and corporate governance efforts to reduce CEO compensation through disclosure and oversight of board decisions.  I’ve been a long time observer of public companies and a reader of their proxy statements. In 70’s and even the 80’s the compensation of the CEO seemed to be mostly a matter arrived at between the board and the CEO that resulted from discussions and negotiations and the public disclosure was a matter of a few pages. But there was then nothing like the  pressure to conform to best practices backed up by the reliance upon the advice of consultants and the concommitant availability of market data that there is today.

You can guess how it works. No board that isn’t about to fire its CEO really wants to admit that their CEO is a less-than-average performer by paying him or her less than average. But if the lowest-paid CEO’s are always being brought up to the average, then the average increases every year. Then for the high performers to be paid well, their compensation needs to be increased, but that raises the average… and so on every year. And the compensation committee and the board always have this market data before them, the recommendations of their consultants and “best practices” to adhere to. These influences are not easily resisted. You see the result.

Like many regulatory unintended consequences, it’s hard for me to see an easy way back. But it’s more than an academic question if you are a director serving on a compensation committee.


  1. gaikokumaniakku says:

    The solution has already been implemented in various co-ops, e.g. the Mondragon Co-Op.

    The highest-ranking people simply decide that some level of income is “dignified,” even though that level is far below the megabuck-level of CEOs.

    If you ask the highest-paid people in the Mondragon Co-Op why they don’t get paid more, they say, “Because I already receive a dignified level of compensation.”

  2. BJK says:

    I’ve been reading about “EVA” and it’s pretty clear that EVA was invented to boost the CEO’s pay. But the CEO does actually have to focus on EVA and not growing sales or vanity projects. So it has good and bad side effects.

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