Monday, August 21, 2006

Price-fixing for executive salaries A stimulating entry on the website Performance and Reward exposes the circular way in which CEO salaries are set. What has happened is that there has been created an artificially small supply of CEO candidates. As site author Patrick Gerard puts it: The prices that are attained in the market cannot be explained in terms of supply and demand. The number of MBA graduations is many times higher than it was twenty years ago, but the price of a CEO has still risen dramatically. Increasing executive pay does not increase the number of potential new CEOs who become available. Potential CEOs have to be trained up, given exposure and opportunities by exiting CEOs. The CEOs therefore have considerable control over supply in their own market. Complicit board members (themselves often CEOs), personnel search firms, and consultants, all of whom have stakes in pushing up CEO salaries. The CEOs on the board are happy to raise the price of such services, while the headhunters and consultants can bill more for finding a $50 million a year guy than a $25 million a year one. Gerard also points the finger at the Business Roundtable, a group of CEOs who set standards for guidelines compensation that are used to justify high salaries. Unlike every other aspect of the modern corporation, there is no real bidding process, no open competition. The result crazy excess unrelated to value. Thanks for the heads-up from the Antitrust Review. 9:29:35 PM

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