I’m a vocal opponent of the minimum wage. The idea, of course, is that when you implement a minimum price for labor, you get an excess of labor. In other words, higher unemployment. I’m equally a vocal opponent of a “maximum wage.” When you place a maximum price on labor, you get a shortage of it. In other words, you can’t find people to hire.
For this reason I take the decidedly unpopular combination of policy stances that we should abolish the minimum wage AND allow corporate CEOs to earn as much money as they can command.
However, this does not mean that I am in favor of just throwing money at the executive suite. The money should be commensurate with the level of competence. And a recent study is finding that it’s not always the case:
To determine how much to pay a CEO, corporate compensation committees look at how much the chiefs of similar companies earn, which has the result of lumping together all CEO talent into one pool. Elson and Ferrere argued that expertise in management isn’t the same, and isn’t as good, as having a deep base of knowledge in one particular industry.
Many of the skills that make a chief executive successful don’t translate to another company. “The theoretical underpinning of [peer grouping] became the notion of transferability,” Elson said. “That was false. The superstar theory of the CEO failed, and if transferability failed, the peer system has to fail.”
“There’s been a sense for some time that the external view of pay-setting has been a problem in ratcheting up pay,” said Paul Hodgson, chief research analyst at corporate governance research company GMI Ratings.
Elson and Ferrere said benchmarking against what other CEOs make is flawed in several ways that inflate pay packages.
One problem is that the definition of what constitutes a “similar” company can be manipulated to skew pay higher by including larger companies or ones in different industries. Institutional shareholders are “very, very suspicious” of that practice, Hodgson said.
Even without manipulation, Elson said companies should decide how much to pay a CEO based on performance, not how much his or her counterparts earn. “If you don’t have that internal benchmark you’ve made a mistake to begin with,” he said.
Make no mistake, highly successful corporate managers earn every dollar they make. But when companies don’t link pay to success, they are hurting themselves.