The topic of out-of-control CEO salaries has been widely covered in the media in the aftermath of the 2008 financial crisis as an example of wealth inequality within some of America’s most profitable companies.
But a new study now sheds some light on the ways CEOs are able to negotiate behind-the-scenes compensation deals to achieve maximum pay.
The study by the University of Cambridge’s Judge Business School explores the use by CEOs of “compensation consultants,” who are typically hired to determine how much to reward employees for the work they do. But after examining the numbers, the study found that hiring compensation consultants was actually used as a “justification device” for higher pay.
Among the study’s findings were that CEOs who used compensation consultants saw a 7.5 percent increase in pay, and that the figure jumped to 13 percent if the CEO got to hire the consultants themselves, as opposed to company board members decided.
The study also found, not surprisingly, that bigger executive pay packages directly correlate to the consultants being hired again and again.
“An increase in client executive pay is associated with the likelihood of the consultant being turned over in the following year. If an increase in pay is associated with a subsequent lower probability of being replaced by a competitor, then consultants indeed have an incentive, on average, to recommend higher pay.”
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