CEO Pay Has Spiked

Surowiecki reveals why:

As the corporate-governance experts Charles Elson and Craig Ferrere write in a recent paper, boards at most companies use what’s called “peer benchmarking.” They look at the C.E.O. salaries at peer-group firms, and then peg their C.E.O.’s pay to the fiftieth, seventy-fifth, or ninetieth percentile of the peer group—never lower. This leads to the so-called Lake Wobegon effect: every C.E.O. gets treated as above average. With all the other companies following the same process, salaries ratchet inexorably higher. “Relying on peer-group comparisons, the way boards do, mathematically guarantees that pay is going to go up,” Elson told me. “Higher pay becomes a kind of self-fulfilling prophecy.”