1155
n
Liaisons and intrigues
the relation between a bunch of economic factors (such as rm
performance and rm size) and CEO remuneration. The only
thing they found was a connection between company sales
and CEO pay. In short, on average, if a rm’s sales increased by
$100 million during the CEO’s tenure, his salary would go up by
$18,000. That’s hardly impressive, now is it?
Then, Charles, Graef, and Brian did something a bit more inter-
esting. You have to realize that the directors on these committees
are usually CEOs or ex-CEOs themselves. Therefore, Charles and
his colleagues compared the salaries of these director CEOs to
the salaries of the CEOs of the companies for which they served
on the remuneration committee. There was a strong relationship
between them. An increment in the average salary of such an
outside director, say, $100,000 was associated with a jump in
salary of $51,000 for the CEO, after statistically correcting for
all the results due to the effects of rm size, protability, etc.!
Charles, Graef, and Brian argued that this association could only
be the result of some sort of psychological social comparison
process. The directors on the remuneration committee who
decide on the CEO’s salary simply determine this guy’s pay by
looking at what they themselves make at their companies. And
thus, doing this, they don’t feel hindered by irrelevant issues
such as the rm’s actual performance during the tenure of the
CEO or any other silly things like that!
And guess what, who do you think usually determines who is
invited to serve as an outside director for a rm? Any guesses?
Yep, it is generally a company’s CEO who nominates new outside
directors. But doesn’t that make it rather tempting for CEOs to
only nominate very highly paid peers to serve as directors on
their boards? You might wonder. Yes
. . . I guess it does . . .
Yes, the more highly paid the
directors who you put on your board,
the more handsomely they are likely
to reward you! Thus, their wealth
may nicely domino into your bank
‘‘
The more highly paid
the directors who you put
on your board, the more
handsomely they are likely
to reward you!
’’