Business Exposed116
account. The last people you’d want on your board are those guys
who are on a meager package themselves; because they would
likely curb your dosh as well. Instead, bring in the rich guys;
they’ll make you rich too!
How to justify paying top managers too much
As I said, the level of top managers’ compensation is often a
contentious topic. Basically, most people think these guys get
paid too much. They claim it’s simply the result of the market
mechanism, supply and demand: good managers are scarce
and therefore they earn hefty salaries (like movie stars, football
players and other demigods).
Although there is of course a bit of a market at work, it has to be
said that the people who determine the pay of a company’s CEO
– the board of directors – do face a conict of interest of sorts.
Board memberships are nice jobs to have, in the sense that they
are usually rather lucrative gigs and provide a pleasant dosage of
power and prestige for those who get them. And – this is where
the conict of interest arises – as I explained in the previous
section, it’s mostly the company’s top managers who nominate
new board members. In the spirit of “don’t bite the hand that
just fed you”, board members may be inclined to reward their
benefactors (i.e., the CEO) handsomely by returning the favor in
the form of a nice compensation package.
Moreover, as also discussed above, directors who deviate from
this social norm (and for instance vote for a relatively low CEO
compensation package) will be frowned upon by the rest of the
business elite, spat at and given the cold shoulder until they
“come to their senses” and change their ridiculous behavior.
For this reason, in various countries, boards of directors now have
to justify the compensation packages they give to their CEOs
by explicitly comparing the rm and its performance to a “peer
group”. The idea is that, due to this forced comparison, it becomes
more difcult for boards to step out of line. The tricky thing is, of
course, how do you determine a company’s peer group?