90% of Companies Set Out to Overpay Their CEOs

Because corporate boards want to think their head honcho is better than others

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The Washington Post today has a doozy of a report trying to explain why executive pay keeps going skyward at American companies while the economy falters. One of the main reasons? The king-of-the-hill way corporate boards set salaries for their executives. Almost every major U.S. company--90 percent, according to researchers--sets its CEO's salary higher than the median pay of his or her peers. That's because every corporation wants to think its head honcho is better than most others--something more broadly known as the "Lake Wobegon" effect, named after Garrison Keillor's fictional town where "all the children are above average." And of course, everyone can't be right: "if every company tries to keep up with or exceed the median pay for executives, executive compensation will spiral upward, regardless of performance." As Warren Buffett once wrote in one of his letters to investors, it's "the argument we all used when children: ‘But, Mom, all the other kids have one.’”

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