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8 Reasons Why CEO Compensation Continues To Rise

Last week, Stephen Colbert told Evan Spiegel, co-founder and CEO of Snapchat, “You are the fifth billionaire I’ve had on my show.” Spiegel joins a growing list of tech executives Colbert has interviewed on the Late Show in the past month — and he is definitely not the only billionaire. According to Fox, the ten highest paid CEOs in the tech industry make between $84 and $19.6 million annually. Across sectors, the average pay package for American CEOs hovers around $22.6 million up from $20.7 million in 2013.

Four fifths of people in Europe, the US and Australia believe that business leaders make too much money and executive salaries should be capped. But with few exceptions, the general acceptance that CEO pay is unsustainably high has not caused a radical shift in organizational practices. A new article in The Conversation written by David Peetz, professor at Griffith University, summarizes his extensive findings about why change CEO compensation continues to soar:

Size and asymmetry:  “Executives of larger corporations command more resources and have greater opportunities for ‘value skimming’, with ‘proximity to large flows of revenue and fees’; so high executive pay reflects ‘the advantages of position’….”. Rather than having opposing identities to executives, the members of boards or committees setting CEO pay are from the same social milieu with broadly similar interests, precluding ‘arms length’ bargaining.”

Status: “The status of a corporation depends in part on the status, and hence pay, of its CEO. As Warren Buffett argues, ‘No company wants to be in the bottom quartile as far as CEO pay goes’.”

Networks: “CEO compensation includes a ‘social circle premium,’ boosted by ‘golfing in the same exclusive club, sharing directors who understand the local pay norm and displaying luxury mansions’. Being a CEO in a company well connected to other company boards increases CEO pay.”

Comparisons: “CEO pay is heavily influenced by comparisons. This is known as relative pay deprivation (or, as Buffett says, ‘envy is bigger than greed’).”

Institutions: “Pay surveys, a recent development, create reference points for CEO pay. Remuneration consultants have gained prominence in the last three decades. They ‘are only seen to be doing their jobs if remuneration rises’.”

Incentives: “The inflation of CEO pay, and its high level in the USA, has principally occurred through expansion of incentives.”

Segmentation: “The 20 highest paid US CEOs received three times the average remuneration of their European equivalents, but on average ran smaller businesses by turnover. Cross-national differences in CEO pay are ‘an expression of deeper social values’…”