How CEOs Jack Up their Pay

Last Updated Mar 7, 2011 2:57 PM EST

Poor, downtrodden, underpaid CEOs finally have someone they can turn to in their hour of need: compensation consultants.

Given the lousy economic situation, it's hard to think that there might be any public-company CEOs that are feeling particularly underpaid right now. But if there are, research from Rezaul Kabir, of the University of Twente, and Marizah Minhat, of Edinburgh Napier University, suggests there's a simple way to boost their pay. Just call in the compensation consultants--the more, the merrier.

Kabir and Minhat studied 175 United Kingdom listed companies from 2003-2006 and tracked the compensation of their CEOs as the companies brought in and occasionally fired compensation consultants. Even though the consultants were supposed to be making sure that CEO pay is properly aligned with shareholder interests, the more compensation consultants a company used, the higher the CEO's pay.

More Consultants Equals More Pay
  • On average, when a firm adds a compensation consultant, CEO pay rises by 8.5%. Firms that decreased the number of consultants saw no difference in CEO pay.
  • At companies with one consultant, median CEO income was 1.239 million (All figures are in pounds, they do include stock and options, and yes, British CEOs get paid less than American ones)
  • With two consultants, median CEO income was 1.391 million
  • With three consultants, median CEO income was 1.58 million
  • With four consultants, median CEO income was 3.615 million
  • Companies with larger boards pay CEOs more.
  • Firms with larger compensation committees tend to employ more consultants.
  • Firms with larger institutional ownership and longer-tenured CEOs employ fewer consultants.
The researchers point out that compensation consultants typically consult on a much wider range of subjects than just CEO pay, including human resources, employee benefits, pensions, risk management and corporate governance. Cutting the CEO's paycheck, the researchers note, doesn't seem like a very good way to win repeat business or to get hired to consult in any other areas.

Do you think CEOs earn their pay? How about compensation consultants?

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Image courtesy of flickr user me and the sysop
Kimberly Weisul is a freelance writer, editor and consultant. Follow her on twitter at www.twitter.com/weisul
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    Kimberly Weisul is the co-founder of One Thing New, the free email newsletter for smart, busy women. She was previously Senior Editor at BusinessWeek, responsible for all coverage of entrepreneurship and for launching BusinessWeek SmallBiz, a bimonthly magazine. She is also a freelance writer, editor and editorial consultant.

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