James Surowiecki on CEO Pay

From the latest New Yorker:

For all the talk of restraining C.E.O. pay, most compensation committees remain what Warren Buffett once called them—“tail-wagging puppy dogs.” At some companies, this is simply because the C.E.O. has packed the board with cronies. But at Home Depot Nardelli did not pick the board members, and most of them were what are usually called independent directors—ones who don’t work for the company or do any business with it. Even when an independent board negotiates a C.E.O.’s contract, however, the directors are often, in a sense, negotiating with themselves. Of the ten independent members of Home Depot’s board, for instance, eight are or have been C.E.O.s. Since C.E.O. pay is often driven by comparisons between companies, directors have a certain interest in keeping executive pay high. Furthermore, the salaries keep escalating because, board members argue, there just aren’t enough good C.E.O. candidates out there. There’s no evidence that this is actually the case, but who is more likely to feel that good C.E.O.s are indispensable and rare than other C.E.O.s?

I’m not so sure interlocking corporate boards is a major source of rising CEO pay. In fact, I’m not convinced that rising CEO is even a problem. Until I see hard evidence, I simply see it as a natural market adjustment. The modern CEO needs more skills to navigate his or her firm through an increasingly complex legal and regulatory environment.

Posted by on January 19th, 2007 at 12:58 pm


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