Why do all CEO’s get paid about the same?
One would think that each companies unique set of strategic goals would lead to the creation of widely varying CEO compensation packages that directly align to the strategies and goals of each respective company. However, it turns out this is far from the case. Instead large companies CEO’s share very similar salaries and benefit packages and one Harvard Business School professor set out to understand just why this is the case. She attempted to unveil the dark curtain that historically shaded the conversation being had between members of a company’s Board of Directors as they sought to determine the worth of their CEO.
She determined that the network effect was largely to blame for the striking similarities between CEO’s compensation packages and attributed this to two main factors. The first being that many directors are members of the Board at multiple firms. Through careful research she was able to create a “Euclidean vector that enabled her to represent the multidimensionality of each compensation contract.” With this, she determined that companies who shared a director were much more likely to have packages that were more similar. This similarity became even more apparent when the respective board member sat on the compensation committee at both companies.
Secondly, after calling numerous fortune 500 companies and polling them on the creation of their CEO’s compensation package she was able to determine that a majority of these companies contract outside firms to assist them in the process. Along with this, these firms often have multiple clients of which they are tasked with the same job. For example, Pearl Meyer has over 1,000 clients, a majority of which are fortune 500 companies. She found that companies who shared these compensation consulting firms tended to have much more similar compensations.
All in all, these two factors have led to a network effect in which the total compensation of CEO’s at major companies has tended to become more and more aligned overtime.
This article was found of Forbes.com a trusted American business magazine with a focus on finance.
http://www.forbes.com/sites/hbsworkingknowledge/2015/11/18/who-really-determines-ceo-salary-packages/