That is what James Surowiecki says in his piece in the New Yorker:
Faith in disclosure has been crucial to the regulation of executive pay since the nineteen-thirties, when companies were first required to reveal those figures. More recently, rules have made companies detail the size and the structure of compensation packages and have enforced transparency about the kinds of comparisons they rely on to determine salaries. The business press, meanwhile, now rigorously tracks executive pay. The result is that shareholders today know far more about C.E.O. compensation than ever before. There’s only one problem: even as companies are disclosing more and more, executive pay keeps going up and up.Haha, the joke's on us--we compelled corporations to provide detailed information and they obliged, perhaps not too enthusiastically. But, "the drive for transparency has actually helped fuel the spiralling salaries."
Haha!
Chalk another victory to the law of unintended consequences!
Good intentions are noble, yes. But, the world does not always shape up the way we intend to make it. We forget that we are humans, and really smart ones at that, and we often adapt to new rules. After all, without such skills to adapt, we would not be the successful species that we are and dominate over the rest of the life forms.
So, back to that executive compensation that has increased to obscene--I don't use that world lightly--amounts. So, what gives? How come now they are doing it so boldly out in the open?
As the corporate-governance experts Charles Elson and Craig Ferrere write in a recent paper, boards at most companies use what’s called “peer benchmarking.” They look at the C.E.O. salaries at peer-group firms, and then peg their C.E.O.’s pay to the fiftieth, seventy-fifth, or ninetieth percentile of the peer group—never lower. This leads to the so-called Lake Wobegon effect: every C.E.O. gets treated as above average. With all the other companies following the same process, salaries ratchet inexorably higher. “Relying on peer-group comparisons, the way boards do, mathematically guarantees that pay is going to go up,” Elson told me. “Higher pay becomes a kind of self-fulfilling prophecy.”Let me see ... in the old days, before transparency, in smoke filled board rooms, after the two-martini lunch, the old boys decided how much the CEO would get paid. It turns out the pay was a much smaller multiple of the median salary of the typical employee as opposed to the highly obscene "two hundred and seventy times as much."
Boy have we helped the CEOs with our requirement for transparency!
It is a typical story all around that transparency has made a lot of things even worse. Universities like the one where I teach lay it out for the public to see how atrociously they waste money--all transparent, they can claim!
Sunlight is supposed to be the best disinfectant. But there’s something naïve about the new S.E.C. rule, which presumes that full disclosure will embarrass companies enough to restrain executive pay. As Elson told me, “People who can ask to be paid a hundred million dollars are beyond embarrassment.” More important, as long as the system for setting pay is broken, more disclosure makes things worse instead of better. We don’t need more information. We need boards of directors to step up and set pay themselves, instead of outsourcing the job to their peers. The rest of us don’t get to live in Lake Wobegon. C.E.O.s shouldn’t, either.Oh yeah, highly responsible decision-makers. But, wait, didn't we get into all this transparency and regulation because we couldn't find enough of those responsible people in the first place?
Feeling confused and, yet, hysterically laughing aloud? Welcome to my world!
