In the last blog I pointed out the problem with comparing CEOs compensation to celebrity stars.
Highly paid CEOs
also argue that they are in a competitive market, like senior
electricians. The problem with this argument is there are only a few
thousand CEOs and it is almost impossible to argue
that there is a standard level of competence as there is with senior
electricians.
How can the hiring committee of the Board of Directors of a corporation know that a CEO has previously been successful? The industry may have been rising (or falling and the CEO helped abate the fall) or the other executives surrounding the CEO really did the successful work and the CEO got the credit.
Disentangling the CEO, other executives, and corporate success is a basic challenge of executive compensation. There is rarely a genuine, reliable or pervasive measure as discussed in this WSJ article, explaining the problem of shareholders voting on CEO pay.
I work in a field (utilities) where the CEO's and their subordinates are pure bureaucrats with no risk other than political ineptitude. They get outrageous compensation with no risk and meaningless measures of accomplishment. The way they set their measures of accomplishment are illustrative of the basic problem: they use shareholder dividends, shareholder capital gains, production output, stock price, customer satisfaction (measured in surveys), comparisons to other companies, capital accumulation and half a dozen other measurements often combined.
Of
course most companies never take compensation away from losers, when
metrics go down, which destroys the credibility of their reward system;
at most the bonus drops to zero, and virtually no companies ever make
public the way the bonus reward systems are calculated. Real evidence
that these measures are meaningless.
I'll know executive compensation is reasonable when (a) the surrounding subordinates are paid in proportion to the top and (b)the subordinates pay is comparable with others in similar fields like CFOs and CIOs (Finance and Information). (c) Most importantly I know the compensation system is reasonable when the bonus reward system is fully public.