Marginal Revolution links to a New York Times editorial on CEO pay. The editorial takes a “contrarian” (or at least unpopulist) view that since CEO pay increases correlate almost perfectly with market capitalization of the largest US firms (at least according to the cited research), CEO salary increases are “fair”.
In reading the comments, it was interesting to note that almost all conversation seemed focused on whether it was appropriate for individual CEO compensation to be linked to market capitalization. My read was slightly different. The research makes an empirical observation about CEO salary in aggregate, and comparing that to aggregate market capitalization. It doesn’t surprise me that individual CEO pay would be more linked to market performance than individual performance–that’s the way other knowledge worker salaries are negotiated. My best developer and my worst developer earn roughly the same amount.
For those interested in examining the relationship between CEO compensation and company performance, I would like to suggest another test: If it’s expected that large firms are expected to a market driven salary for their CEO, and if it’s assumed that every large firm needs a CEO, there should be little relationship between a firm’s spending on CEO pay and the firms financial performance. Commenters seem agreed on this point. Instead, measuring a relationship between CEO performance and corporate performance would require measuring CEO pay from the CEO’s perspective, and this requires a cumulative measure. Something like average annual salary during period when active in CEO labor market would work. My hypothesis would be that while instantaneous employed CEO compensation is relatively flat, CEOs of more successful companies would spend a greater percentage of their time in the labor market actually employed. Assuming a strong positive relationship between time employed and total compensation (another testable hypothesis) we would have a better indication as to whether CEO pay is reflective of corporate performance.
UPDATE: One additional thought: as stock options and stock grants were considered CEO compensation in the research study, increases in market capitalization would directly increase CEO pay. As stock options become a larger percentage of CEO compensation the effect will increase. Seems like the same variable is being used in both sides of the equation.
