Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:


Study: Benchmarks and 'leapfrogs' drive up CEO pay

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:

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

More articles from Studies and Analyses:

nachricht Diagnoses: When Are Several Opinions Better Than One?
19.07.2016 | Max-Planck-Institut für Bildungsforschung

nachricht High in calories and low in nutrients when adolescents share pictures of food online
07.04.2016 | University of Gothenburg

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: Novel light sources made of 2D materials

Physicists from the University of Würzburg have designed a light source that emits photon pairs. Two-photon sources are particularly well suited for tap-proof data encryption. The experiment's key ingredients: a semiconductor crystal and some sticky tape.

So-called monolayers are at the heart of the research activities. These "super materials" (as the prestigious science magazine "Nature" puts it) have been...

Im Focus: Etching Microstructures with Lasers

Ultrafast lasers have introduced new possibilities in engraving ultrafine structures, and scientists are now also investigating how to use them to etch microstructures into thin glass. There are possible applications in analytics (lab on a chip) and especially in electronics and the consumer sector, where great interest has been shown.

This new method was born of a surprising phenomenon: irradiating glass in a particular way with an ultrafast laser has the effect of making the glass up to a...

Im Focus: Light-driven atomic rotations excite magnetic waves

Terahertz excitation of selected crystal vibrations leads to an effective magnetic field that drives coherent spin motion

Controlling functional properties by light is one of the grand goals in modern condensed matter physics and materials science. A new study now demonstrates how...

Im Focus: New 3-D wiring technique brings scalable quantum computers closer to reality

Researchers from the Institute for Quantum Computing (IQC) at the University of Waterloo led the development of a new extensible wiring technique capable of controlling superconducting quantum bits, representing a significant step towards to the realization of a scalable quantum computer.

"The quantum socket is a wiring method that uses three-dimensional wires based on spring-loaded pins to address individual qubits," said Jeremy Béjanin, a PhD...

Im Focus: Scientists develop a semiconductor nanocomposite material that moves in response to light

In a paper in Scientific Reports, a research team at Worcester Polytechnic Institute describes a novel light-activated phenomenon that could become the basis for applications as diverse as microscopic robotic grippers and more efficient solar cells.

A research team at Worcester Polytechnic Institute (WPI) has developed a revolutionary, light-activated semiconductor nanocomposite material that can be used...

All Focus news of the innovation-report >>>



Event News

#IC2S2: When Social Science meets Computer Science - GESIS will host the IC2S2 conference 2017

14.10.2016 | Event News

Agricultural Trade Developments and Potentials in Central Asia and the South Caucasus

14.10.2016 | Event News

World Health Summit – Day Three: A Call to Action

12.10.2016 | Event News

Latest News

Prototype device for measuring graphene-based electromagnetic radiation created

28.10.2016 | Power and Electrical Engineering

Gamma ray camera offers new view on ultra-high energy electrons in plasma

28.10.2016 | Physics and Astronomy

When fat cells change their colour

28.10.2016 | Life Sciences

More VideoLinks >>>