Tuesday, January 16, 2007


The Boss Is The One With The Longest Tentacles

The boss may be paid what he is because of his tentacular connections with all those other bosses out there. The guys from his old frat house, his business school classmates, his golfing buddies - and especially the guys who sit on the board of the company he supposedly runs. As the article at the link below points out, having connections is generally beneficial. It keeps CEOs well-informed, for one thing. But connections become obstructive to the interest of shareholders when they result in the obligation to scratch the other guy's back so he'll scratch yours. The thing about corporate boards is that they're stacked to the gills with past, present and future CEOs, all of whom may have a direct or indirect relationship with the man whose compensation they must determine. The CEOs of two different companies could easily be on each other's boards, deciding on each other's pay. The mentor of the current CEO may be sitting on the board that decides the pay of his protege. One board member of Company X may eventually be appointed CEO of another company on whose board the CEO of Company X may preside, either now or later. The temptation of the board to overpay the CEO so that he too, at some point or other, will feel obligated to overpay each of them is surely irresistible.

Even if none of the past and present CEOs on the board know the current CEO from a hole in the wall, they are still CEOs - and the collective self-interest of their profession is frequently enough to prejudice them in favor of paying any one CEO too much. One must remember that the claim that talented CEOs are a rare commodity is made exclusively by other CEOs, and therefore cannot possibly be objective. In fact, CEOs are generally paid based on what other CEOs are paid, such that the more any one CEO is compensated, the more other CEOs are likely to be compensated as well. For the board members of corporations, overpaying the CEO is "win-win" situation. They pay him more, so that he will pay them more, and on and on it goes, in a neverending spiral of unearned wealth derived not from what you know, but who you know.

"The Sky-High Club" from The New Yorker

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