It’s been a big couple of weeks in the world of executive pay, as President Obama proposed $500,000 salary caps for banks taking part in future bailout funds and the country jeered Wall Street bankers’ $18 billion in bonuses despite a disastrous year for their companies.
One factor that’s missing in the debate is a look at how much the people make who are setting the pay. The always insightful Bob Sutton posted a blog yesterday (“CEO Compensation Research: Why You Want Rich People to Set Your Pay”) that Treasury Secretary Timothy Geithner should be reading. In it, he talks about a 20-year old study by his colleague, Charles O’Reilly, and former compensation consultant Bud Crystal. The study found, unsurprisingly, that for every $100,000 the average comp committee member is paid, CEO pay goes up another $51,000 per year. The study, Sutton notes, “is based on research on social comparison and anchoring — the idea is that members of the compensation committee would use their own pay as a guide to help determine how much to pay the CEO — and would be excessively swayed by this vivid information.”
It makes sense, of course. Ten million doesn’t look like a whole lot to someone else who makes 20 million. And that’s before the fees they get paid as directors, which, according to the Corporate Library, grew by 12% in 2008. There’s a lot of focus on executive pay. Maybe there should be more on how much directors make, too.
UPDATE: The Corporate Library updated its numbers on Feb. 9 for board compensation increases. For the third year in a row, board pay grew by double digits. The median increase in total board compensation was just under 11 percent, the Corporate Library reports, while the median increase in compensation for individual directors was slightly higher, at almost 12 percent.
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