WashPost: "Cozy relationships and ‘peer benchmarking’ send CEOs’ pay soaring"

[DaveS]

Ted King wrote:
I didn't ask for proof, I asked for evidence that it is common practice to pay more than median.

We are talking two very different sides of the article. Your question is not the one that I first wrote about. I talked about the methodology of how CEO pay is determined and how that same methodology is used everywhere. Can we prove that the methodology i.e. peer benchmarking causes companies to pay more than the median? Absolutely not, nor was it intended by my first observations.

What we do know - mathematically - is that pure benchmarking does indeed drive up wages all by itself. Which is why pure benchmarking is not practiced.

You also don't seem to allow for VIP candidates versus the "more normal" applicant. It is the VIP candidates that ultimately drive up everybody's pay.

You can get directly into the principles of benchmarking from a negotiating standpoint. Which is why I pointed out the Union's use of the principles when negotiating the Big 3 contracts. Certainly those contracts are driving up wages and benefits. The same is true of sports contracts, etc. etc.

Are companies determined to pay more than median wages? Not typically - unless they are trying to attract or hold on to talent, not just "median/average" workers. But as the history of Apple, Microsoft and Google (as examples) all show - if you need or want talent you had better pay more than "median".

[Ted King]

DaveS wrote:
[quote=Ted King]
I didn't ask for proof, I asked for evidence that it is common practice to pay more than median.

We are talking two very different sides of the article. Your question is not the one that I first wrote about. I talked about the methodology of how CEO pay is determined and how that same methodology is used everywhere. Can we prove that the methodology i.e. peer benchmarking causes companies to pay more than the median? Absolutely not, nor was it intended by my first observations.

What we do know - mathematically - is that pure benchmarking does indeed drive up wages all by itself. Which is why pure benchmarking is not practiced.

You also don't seem to allow for VIP candidates versus the "more normal" applicant. It is the VIP candidates that ultimately drive up everybody's pay.

You can get directly into the principles of benchmarking from a negotiating standpoint. Which is why I pointed out the Union's use of the principles when negotiating the Big 3 contracts. Certainly those contracts are driving up wages and benefits. The same is true of sports contracts, etc. etc.

Are companies determined to pay more than median wages? Not typically - unless they are trying to attract or hold on to talent, not just "median/average" workers. But as the history of Apple, Microsoft and Google (as examples) all show - if you need or want talent you had better pay more than "median".
I have no idea what "pure" benchmarking is, but it is very evident from the article in the OP that what's being referred to is a dynamic where the large majority of corporate boards are setting out to spend more than the median salary for CEO's and that dynamic has led to a large ratcheting up of CEO salaries.

You keep coming back with examples where people considered for a position are compared to their peers. Of course, that happens all the time. But the important bit in the context of the issue raised in the OP is whether or not those paying the salaries for those individuals have determined ahead of time that they need to pay more than the median salary for the position when looking at the comparison of what similar individuals make. The tale-tell sign of that dynamic is seeing salaries going up rapidly over the last few decades for the group targeted for the "we need to pay more than the median salary" consideration. Show me with data like this:

[Ted King]

DaveS wrote:

Are companies determined to pay more than median wages? Not typically - unless they are trying to attract or hold on to talent, not just "median/average" workers. But as the history of Apple, Microsoft and Google (as examples) all show - if you need or want talent you had better pay more than "median".

Oops, I meant to also respond to that last point but forgot.

From the article cited in the OP:

Since then, researchers have found that about 90 percent of major U.S. companies expressly set their executive pay targets at or above the median of their peer group. This creates just the kinds of circumstances that drive pay upward.

Moreover, the jump in pay because of peer benchmarking is significant. A chief executive’s pay is more influenced by what his or her “peers” earn than by the company’s recent performance for shareholders, according to two independent research efforts based on the new disclosures. One was by Michael Faulkender at the University of Maryland and Jun Yang of Indiana University, and another was led by John Bizjak at Texas Christian University.

This is the conclusion of researchers based on data provided by the Fed. It's not just a few companies - it's a systemwide phenomenon. If it were only a small number of companies paying more than the median, you wouldn't see the large rise in CEO pay.

It's a phenomenon where what may be "good" on an individual basis is not "good" when it is duplicated systemwide. If a farmer plants a lot of soybeans and makes a lot money that's a good thing. But then a lot of other farmers also plant a lot of soybeans and pretty soon none of them are making any money. (Not a close analogy to the CEO thing, but it is an example of the underlying "good for the individual, but not so good when duplicated over and over" kind of thing.)

[DaveS]

Ted King wrote:

Since then, researchers have found that about 90 percent of major U.S. companies expressly set their executive pay targets at or above the median of their peer group. This creates just the kinds of circumstances that drive pay upward.

Moreover, the jump in pay because of peer benchmarking is significant. A chief executive’s pay is more influenced by what his or her “peers” earn than by the company’s recent performance for shareholders, according to two independent research efforts based on the new disclosures. One was by Michael Faulkender at the University of Maryland and Jun Yang of Indiana University, and another was led by John Bizjak at Texas Christian University.

This is the conclusion of researchers based on data provided by the Fed. It's not just a few companies - it's a systemwide phenomenon. If it were only a small number of companies paying more than the median, you wouldn't see the large rise in CEO pay.

It's a phenomenon where what may be "good" on an individual basis is not "good" when it is duplicated systemwide. If a farmer plants a lot of soybeans and makes a lot money that's a good thing. But then a lot of other farmers also plant a lot of soybeans and pretty soon none of them are making any money. (Not a close analogy to the CEO thing, but it is an example of the underlying "good for the individual, but not so good when duplicated over and over" kind of thing.)

Let me start by stating that I don't think we are in disagreement regarding "executive pay", why it's high and how out of whack it is compared to (in most cases) the metrics of one's individual company.

Our difference is whether "peer benchmarking" is the cause. Your article states that it is, i.e ... "the jump in pay because of peer benchmarking is significant. A chief executive’s pay is more influenced by what his or her “peers” earn than by the company’s recent performance for shareholders."

I disagree that a system of measurements can "cause" a result in or by itself. Rather it is human interpretation of the data that "decides on the results". It this case we have Boards of Directors (human beings) deciding that their CEO compensation packages should be above the median (based on the system of peer benching) WITHOUT tying the package to the actual performance of the company versus their competitors (the data of peer benchmarking). That is human failure, not a metrics failure.

You also state:
"It's a phenomenon where what may be "good" on an individual basis is not "good" when it is duplicated systemwide."

I think the data shows exactly the opposite and I think the article confirms it. If you believe that peer benchmarking is the cause of
"higher pay" then that fact that it has driven up ALL CEO pay means that it has been good for more than the individual. It's been good for all CEOs.

And in actuality your own data (the graph) shows that the median pay for "average workers" climbed 3 fold (40 to 120 in 10 years) Far and above the historical averages. That this data is overshadowed by the CEO data doesn't make it less so. And if you believe "benchmarking" is the cause of CEO pay why is it NOT the cause of the historic increase in average workers' pay?

[Ted King]

DaveS wrote:
[quote=Ted King]

Since then, researchers have found that about 90 percent of major U.S. companies expressly set their executive pay targets at or above the median of their peer group. This creates just the kinds of circumstances that drive pay upward.

Moreover, the jump in pay because of peer benchmarking is significant. A chief executive’s pay is more influenced by what his or her “peers” earn than by the company’s recent performance for shareholders, according to two independent research efforts based on the new disclosures. One was by Michael Faulkender at the University of Maryland and Jun Yang of Indiana University, and another was led by John Bizjak at Texas Christian University.

This is the conclusion of researchers based on data provided by the Fed. It's not just a few companies - it's a systemwide phenomenon. If it were only a small number of companies paying more than the median, you wouldn't see the large rise in CEO pay.

It's a phenomenon where what may be "good" on an individual basis is not "good" when it is duplicated systemwide. If a farmer plants a lot of soybeans and makes a lot money that's a good thing. But then a lot of other farmers also plant a lot of soybeans and pretty soon none of them are making any money. (Not a close analogy to the CEO thing, but it is an example of the underlying "good for the individual, but not so good when duplicated over and over" kind of thing.)

Let me start by stating that I don't think we are in disagreement regarding "executive pay", why it's high and how out of whack it is compared to (in most cases) the metrics of one's individual company.

Our difference is whether "peer benchmarking" is the cause. Your article states that it is, i.e ... "the jump in pay because of peer benchmarking is significant. A chief executive’s pay is more influenced by what his or her “peers” earn than by the company’s recent performance for shareholders."

I disagree that a system of measurements can "cause" a result in or by itself. Rather it is human interpretation of the data that "decides on the results". It this case we have Boards of Directors (human beings) deciding that their CEO compensation packages should be above the median (based on the system of peer benching) WITHOUT tying the package to the actual performance of the company versus their competitors (the data of peer benchmarking). That is human failure, not a metrics failure.

You also state:
"It's a phenomenon where what may be "good" on an individual basis is not "good" when it is duplicated systemwide."

I think the data shows exactly the opposite and I think the article confirms it. If you believe that peer benchmarking is the cause of
"higher pay" then that fact that it has driven up ALL CEO pay means that it has been good for more than the individual. It's been good for all CEOs.

And in actuality your own data (the graph) shows that the median pay for "average workers" climbed 3 fold (40 to 120 in 10 years) Far and above the historical averages. That this data is overshadowed by the CEO data doesn't make it less so. And if you believe "benchmarking" is the cause of CEO pay why is it NOT the cause of the historic increase in average workers' pay?
Okay, I'm about to give up on this. You are hung up on a semantic issue - that a "method" in and of itself cannot cause something. Of course, it's people choosing to use the method, but that doesn't effect the substance of the conclusions in the report in the article cited in the OP. But for some reason you seem to think that that semantic issue has some great cogency. I am not interested in going down that dead end any more.

As for the "good for the individual", you didn't follow the analogy. In the analogy the individual is the individual corporation doing the hiring not the individual hired. If it were only one individual corporation paying more than the median for a CEO, that would probably be good for that individual corporation because they would be likely to get a better CEO than not paying more than the median. But when a large number of corporations try to do the same thing, that isn't a good thing because it causes a wratcheting up of salaries without the corporation necessarily getting a better CEO in the process. I will admit that I should have written that section to make the it more clear what "individual" meant in that context.

And you didn't read the graph correctly. There is no direct data on average wages, the numbers on the right are a ratio of money earned by CEO to the average of wage earners. IOW, zero on the right scale would mean that CEO's made the same as the average wage earner. "20" on the right scale means that the CEO's made 20 times the average of wage earners. In 1970, CEO's averaged less than 40 times the average of wage earner. By 2005 CEO's averaged more than 160 times the average wage earner. Both the "Average" and "Median" lines on the graph are about the ratio of earnings the CEO's made relative to wage earners - neither is indicating directly what wage earners made as an average or a median. That you didn't understand that in the first place is another reason why I'm feeling like I've had enough of this discussion. My frustration level is getting up there again.

[Ted King]

Ted King wrote:
That you didn't understand that in the first place is another reason why I'm feeling like I've had enough of this discussion. My frustration level is getting up there again.

I wish I had reflected on that statement more before I put it down, and certainly more on it before the time lapsed on my ability to edit the comment out. It was unduly harsh. I don't like what this discussion happens to be doing to my attitude at the moment, so I think I'd better bail out.