Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Study: Benchmarks and 'leapfrogs' drive up CEO pay

26.05.2010
Why have CEO salaries skyrocketed over the past 20 years? Much of the blame lies in the practice of compensation benchmarking, say the authors of a study to be published next week in the American Journal of Sociology.

Benchmarking is a standard practice in American corporations. When setting pay, compensation committees use peer groups of executives at comparable firms to establish a "fair" market wage their CEOs. But according to the study, led by sociologist Thomas DiPrete from Columbia University, a few CEOs each year "leapfrog" their peers by getting huge raises that have little to do with the performance of their companies. Other companies then use the oversized pay of leapfroggers in subsequent benchmarks. Over time, this ratchets up pay for everyone through a "contagion effect."

"We show that rising CEO pay is not simply a function of what individual companies do, but is influenced by the behavior of leapfroggers at other firms," DiPrete said.

DiPrete and his colleagues (including a former CEO) used procedures laid out in compensation handbooks to reconstruct likely peer groups for CEOs listed in Standard and Poor's annual compensation surveys. They could then look for evidence of leapfrogging in those likely peer groups over time. Their simulation shows that leapfrogging explains about half of the overall increase in CEO pay from 1992 to 2006.

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. However, this study shows that ill-gotten raises for a few CEOs can lead to "legitimate" pay increases for others. "[T]he linkages among firms produced by the benchmarking process guarantee that firm-level governance failure becomes a factor in the environment of other firms," the researchers write.

Following the Enron and WorldCom scandals of the early 2000s, the Securities and Exchange Commission changed its rules to require firms to disclose benchmarking information. The research team is now using the new data mandated by the SEC to better understand how the network structure of peer groups affects executive pay setting in American corporations.

"Whether the SEC regulatory change reduces the ratcheting effect of leapfrogging on CEO pay -- creating more transparency about who is in the peer group and at what level the company is benchmarking -- is an important question for future research" says DiPrete.

Thomas A. DiPrete, Greg Eirich and Matthew Pittinsky, "Compensation Benchmarking, Leapfrogs, and the Surge in Executive Pay." American Journal of Sociology (May 2010).

Established in 1895 as the first U.S. scholarly journal in its field, the American Journal of Sociology remains a leading voice for analysis and research in the social sciences.

Kevin Stacey | EurekAlert!
Further information:
http://www.uchicago.edu

Further reports about: Benchmark Programme Benchmarking CEO salaries SEC Sociology social science

More articles from Studies and Analyses:

nachricht Real-time feedback helps save energy and water
08.02.2017 | Otto-Friedrich-Universität Bamberg

nachricht The Great Unknown: Risk-Taking Behavior in Adolescents
19.01.2017 | Max-Planck-Institut für Bildungsforschung

All articles from Studies and Analyses >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Breakthrough with a chain of gold atoms

In the field of nanoscience, an international team of physicists with participants from Konstanz has achieved a breakthrough in understanding heat transport

In the field of nanoscience, an international team of physicists with participants from Konstanz has achieved a breakthrough in understanding heat transport

Im Focus: DNA repair: a new letter in the cell alphabet

Results reveal how discoveries may be hidden in scientific “blind spots”

Cells need to repair damaged DNA in our genes to prevent the development of cancer and other diseases. Our cells therefore activate and send “repair-proteins”...

Im Focus: Dresdner scientists print tomorrow’s world

The Fraunhofer IWS Dresden and Technische Universität Dresden inaugurated their jointly operated Center for Additive Manufacturing Dresden (AMCD) with a festive ceremony on February 7, 2017. Scientists from various disciplines perform research on materials, additive manufacturing processes and innovative technologies, which build up components in a layer by layer process. This technology opens up new horizons for component design and combinations of functions. For example during fabrication, electrical conductors and sensors are already able to be additively manufactured into components. They provide information about stress conditions of a product during operation.

The 3D-printing technology, or additive manufacturing as it is often called, has long made the step out of scientific research laboratories into industrial...

Im Focus: Mimicking nature's cellular architectures via 3-D printing

Research offers new level of control over the structure of 3-D printed materials

Nature does amazing things with limited design materials. Grass, for example, can support its own weight, resist strong wind loads, and recover after being...

Im Focus: Three Magnetic States for Each Hole

Nanometer-scale magnetic perforated grids could create new possibilities for computing. Together with international colleagues, scientists from the Helmholtz Zentrum Dresden-Rossendorf (HZDR) have shown how a cobalt grid can be reliably programmed at room temperature. In addition they discovered that for every hole ("antidot") three magnetic states can be configured. The results have been published in the journal "Scientific Reports".

Physicist Dr. Rantej Bali from the HZDR, together with scientists from Singapore and Australia, designed a special grid structure in a thin layer of cobalt in...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Booth and panel discussion – The Lindau Nobel Laureate Meetings at the AAAS 2017 Annual Meeting

13.02.2017 | Event News

Complex Loading versus Hidden Reserves

10.02.2017 | Event News

International Conference on Crystal Growth in Freiburg

09.02.2017 | Event News

 
Latest News

Impacts of mass coral die-off on Indian Ocean reefs revealed

21.02.2017 | Earth Sciences

Novel breast tomosynthesis technique reduces screening recall rate

21.02.2017 | Medical Engineering

Use your Voice – and Smart Homes will “LISTEN”

21.02.2017 | Trade Fair News

VideoLinks
B2B-VideoLinks
More VideoLinks >>>