Cronyism and Executive Compensation

A Washington Post examination of how "peers" inflate CEO pay

Companies tend to try to pay their employees as little as possible without killing morale and suffering high turnover. But when those employees are executives (and execs are in shareholders’ employ as much as the lowliest prole is) the idea becomes: Make sure they make as much as their peers, even if the company’s going downhill.

Why’s that? The Washington Post, in the latest installment of its excellent series on executive pay as a key driver of soaring inequality, looks at how corporate cronyism is at the heart of why CEO paychecks have ballooned over the last few decades.

Peter Whoriskey centers the piece on Kevin Sharer, CEO of biotech firm Amgen, whose board gave him a raise earlier this year despite the fact that its investors at the time had lost 7 percent on the stock in the last five years. Or that’s what the Post reports, anyway. I get a 31 percent decline in Amgen’s stock for the five years up to March 2, when the board meeting was held (Through ten years isn’t much better, down 29 percent).

Why do corporate boards insist on paying their CEOs based on what their peers are making? I like how the Post gives us this data to show how stacked boards are with the CEO’s pals (this is not to mention that many CEOs also chair the boards):

These kinds of ties — between chief executives and the boards that oversee them — permeate corporate America. On a typical board, the chief executive considers about about 33 percent of the board of directors as “friends” rather than as mere “acquaintances,”according to a survey of chief executives at about 350 S&P 1500 corporations conducted over 15 years by University of Michigan business professor James Westphal.

More tellingly, the chief executive is likely to find even more friends on the compensation committees of corporate boards — almost 50 percent.

It reports that two-thirds of Amgen’s compensation committee had personal or professional connections to Sharer before they joined the board.

I’m glad to see the Post fill this story out with additional anecdotes. An earlier piece in this series was excellent but focused solely on one anecdote, but there’s no shortage of them here:

At Adobe Systems, the software company, chief executive Shantanu Narayen earned $12.2 million in 2010 despite the fact that shareholder returns have been negative over one- and five-year time frames. A key driver? The compensation committee decided that Narayen should be paid at the 90th percentile of peers.

And it benefits from that extra reporting that often round out a piece. The Post had somebody on the ground in Colorado for this story, and it comes out with this great string contrasting how Amgen treats its top employee compared to the rest of its workforce:

Sharer has tried to cut costs, however, pushing out workers at plants around the country: at its headquarters in Thousand Oaks, in West Greenwich, R.I., and Longmont, Colo.

Outside the Longmont plant recently, where more than 90 workers were laid off in June, a pair of contract workers said they’d been hired to replace dismissed workers.

“We’re cheaper,” one explained. “Honestly, I’m just glad to have a job.”

Amgen’s misnamed CEO, meantime, got a 37 percent raise to $21 million a year while putting 2,700 employees out of work. The board wanted to keep up with his “peers.” But look how it decided who they were:

Bias can creep into the process in several ways. At Amgen, it began with the choosing of “peers.”

Amgen selected 11 companies in the biotech/pharmaceutical field, which seems natural enough. But most of the companies on the list are far larger than Amgen. Amgen’s revenue in 2010 was $15 billion; the median revenue of its peer companies was $40 billion, according to Equilar.

Great stuff from the Post.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,