Transparency Fail

How companies game the system to boost CEO pay

Prof. Mathijs De Vaan

A rule designed to make executive compensation more transparent has instead given companies a tool to push CEO pay even higher, says analysis by Haas Asst. Prof. Mathijs De Vaan and researchers from Columbia University published in Management Science.

Since 2006, the Securities and Exchange Commission has required public companies to name a group of peer companies that they use to benchmark their chief executives’ salaries, giving investors and the public a reference point to judge whether CEO paychecks are within reason. But while benchmarking is a good idea in theory— applauded by corporate governance experts—in practice companies tend to cherry-pick peers with highly paid CEOs to legitimize excessive pay.

What’s more, companies are even more likely to skew their peer group when their CEO underperforms by failing to meet performance targets, such as stock market value and profit. Underperforming CEOs, researchers found, got especially generous pay packages.

De Vaan and colleagues analyzed more than 3,400 companies that reported compensation peer groups to the SEC between 2006 and 2016. While the median market capitalization for companies in the S&P 1500 grew just 22% from 2007 to 2014, median CEO compensation grew 39%, they found.

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