It’s scary to think that I first started talking about CEO and executive compensation almost FOUR years ago. While we aren’t in the glory days of fall 2008 (ahahahahahaha!) executive pay remains a big topic of conversation because not much has changed with it. Thankfully, the government has deemed it wise to stay out of regulating pay for now. We all know CEO pay tends to be astronomical, many times they make 300x the average US worker. Sometimes more. There are some justifications for this. First of all they run massive companies and in a capitalist economy your boss makes more than you and less than their boss. However one of the other explanations for CEO pay is that if the current company doesn’t pay them $X million then they can just go to a competitor who will pay them $X million.
This assumption is most analogous to sports. A star football player has virtually the same worth no matter what team they are on. So when their contracts come up for negotiation and they don’t think they’re getting enough from the current team they will test the waters at other teams to get a better gauge of their actual worth. Coaches are sort of the same. A head coach can demand similar pay at just about any team interested in them and have similar degrees of success. They can even leave teams they’ve struggled with and still be great elsewhere. A coach can put in their own system and create the environment that fosters success. CEO pay is based on a similar assumption. But there’s a problem.
While many CEOs likely consider themselves superstar athletes, they aren’t. A new study says the skills that make them successful at one company are not easily transferred to other companies. That can be anything from intimate knowledge of the business operations, connections with customers, or simply the influence earned over a career of working with the same people. But the leadership at the top doesn’t seem to transfer well if bouncing to a competitor. Perhaps some industries are the exception as I can think of Wall Street execs that fit this mold but also some that have bounced around successfully.
But this should certainly be interesting in board rooms across the country. It’s not a huge cost save because their pay is such a small fraction of the overall expenses. However the public viewpoint of inflated executive pay packages can negatively impact the perception of the company.
There’s only one downside to this research and its connection with executive pay. It doesn’t touch on the idea that these execs are paid so well because no one else can do the job better. I’m not saying this is the case, but if a company’s board believes it, then they are still likely to turn to peer salaries to figure out what to pay their CEO.