Secret to CEOs' superhike despite firm's loss - Benchmarking

By SiliconIndia   |   Thursday, 27 May 2010, 10:45 Hrs   |    3 Comments
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Secret to CEOs' superhike despite firm's loss - Benchmarking
Washington:Increase in salary of a CEO in one company has a lot to do with the salary of their counterparts in other firms.Compensation benchmarking, a normal practice in American companies, is the main factor behind the sudden growth in CEO salaries over the past to decades, says a research. When setting salary, compensation committees use peer groups of executives at comparable firms to establish a fair market wage for their CEOs, according to a report by ANI.

The study, led by Sociologist, Thomas DiPrete of Columbia University, has found that a few CEO every year 'leapfrog' their peers by getting huge increase that have nothing to do with the performance of their companies.

"The linkages among firms produced by the benchmarking process guarantee that firm-level governance failure become a factor in the environment of other firms," said DiPrete. Their simulation shows that leapfrogging explains about half of the overall increase in CEO pay from 1992 to 2006.

DiPrete and his colleagues, including a former CEO, used procedures suggested in compensation handbooks to reconstruct likely peer groups for CEOs listed in Standard and Poor's annual compensation surveys. The study shows that ill-gotten raises for a few CEOs can lead to a legitimate pay increase for others. The study is expected to be published in the American Journal of Sociology next week.

The researchers say that the finding broadens the debate about what is driving CEO salaries upward. Opinions on the subject have generally fallen into two camps: those who think CEOs are overpaid because of failures in corporate governance at individual firms, and those who think CEOs are paid what they deserve based on the profits they deliver to shareholders and a "superstar" labor market.

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