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 The importance of biodiversity in forests could increase due to climate change
17.11.2017 | Deutsches Zentrum für integrative Biodiversitätsforschung (iDiv) Halle-Jena-Leipzig

nachricht Win-win strategies for climate and food security
02.10.2017 | International Institute for Applied Systems Analysis (IIASA)

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: A “cosmic snake” reveals the structure of remote galaxies

The formation of stars in distant galaxies is still largely unexplored. For the first time, astron-omers at the University of Geneva have now been able to closely observe a star system six billion light-years away. In doing so, they are confirming earlier simulations made by the University of Zurich. One special effect is made possible by the multiple reflections of images that run through the cosmos like a snake.

Today, astronomers have a pretty accurate idea of how stars were formed in the recent cosmic past. But do these laws also apply to older galaxies? For around a...

Im Focus: Visual intelligence is not the same as IQ

Just because someone is smart and well-motivated doesn't mean he or she can learn the visual skills needed to excel at tasks like matching fingerprints, interpreting medical X-rays, keeping track of aircraft on radar displays or forensic face matching.

That is the implication of a new study which shows for the first time that there is a broad range of differences in people's visual ability and that these...

Im Focus: Novel Nano-CT device creates high-resolution 3D-X-rays of tiny velvet worm legs

Computer Tomography (CT) is a standard procedure in hospitals, but so far, the technology has not been suitable for imaging extremely small objects. In PNAS, a team from the Technical University of Munich (TUM) describes a Nano-CT device that creates three-dimensional x-ray images at resolutions up to 100 nanometers. The first test application: Together with colleagues from the University of Kassel and Helmholtz-Zentrum Geesthacht the researchers analyzed the locomotory system of a velvet worm.

During a CT analysis, the object under investigation is x-rayed and a detector measures the respective amount of radiation absorbed from various angles....

Im Focus: Researchers Develop Data Bus for Quantum Computer

The quantum world is fragile; error correction codes are needed to protect the information stored in a quantum object from the deteriorating effects of noise. Quantum physicists in Innsbruck have developed a protocol to pass quantum information between differently encoded building blocks of a future quantum computer, such as processors and memories. Scientists may use this protocol in the future to build a data bus for quantum computers. The researchers have published their work in the journal Nature Communications.

Future quantum computers will be able to solve problems where conventional computers fail today. We are still far away from any large-scale implementation,...

Im Focus: Wrinkles give heat a jolt in pillared graphene

Rice University researchers test 3-D carbon nanostructures' thermal transport abilities

Pillared graphene would transfer heat better if the theoretical material had a few asymmetric junctions that caused wrinkles, according to Rice University...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Ecology Across Borders: International conference brings together 1,500 ecologists

15.11.2017 | Event News

Road into laboratory: Users discuss biaxial fatigue-testing for car and truck wheel

15.11.2017 | Event News

#Berlin5GWeek: The right network for Industry 4.0

30.10.2017 | Event News

 
Latest News

NASA detects solar flare pulses at Sun and Earth

17.11.2017 | Physics and Astronomy

NIST scientists discover how to switch liver cancer cell growth from 2-D to 3-D structures

17.11.2017 | Health and Medicine

The importance of biodiversity in forests could increase due to climate change

17.11.2017 | Studies and Analyses

VideoLinks
B2B-VideoLinks
More VideoLinks >>>