How boards inflate executive pay

Filed in archive executive pay on July 27, 2010

While the rest of the world has been struggling losing jobs and homes, executive pay at the biggest banks and financial institutions has gone up. Particularly at those banks that were bailed out by US taxpayers which ended up paying $1.6 billion in bonuses, presumably for non-performance.

A new study, reported in the New York Times DealBook, shows exactly how it happens. Researchers have found that boards routinely benchmark their executive pay with peers in their industry group. But here's the sneaky part. Researchers have found that they benchmark themselves against peers that happen to pay more than the others.

In other words, soaring executive compensation for unmerited performance is very much the result of boards trying to keep up with the Joneses.

The only way to address this problem is to bring in rules that require companies to disclose exactly and in full detail how they arrived at their decision to reward executives so handsomely. Until that's done, executive pay will continue to escalate out of proportion with the rest of the economy.