October 10, 2013

On the increase of CEO salaries

I've begun reading the book Predictably Irrational by Dan Ariely, which is a great book on the subject of psychology. Among other topics, the book will explain why the markets aren't efficient because humans aren't efficient, why the demand and supply curve isn't working as expected, and why the salaries of CEOs have increased.

In 1993, the federal securities regulators began to force companies to reveal details about the salaries and benefits of the top executives. In 1976, the average CEO was paid 36 times as much as the average worker, but in 1993, the average CEO was paid 131 times as much as the average worker. The  federal securities regulators wanted to stop the increase and lower the difference between the CEO and the average worker. They argued that if they forced companies to reveal how much the executives got in salary and benefits, the difference between the CEO and the average worker would decrease because the board of the companies would be reluctant to give executives crazy-high salaries.

A few years later, the average CEO was paid 269 times as much as the average worker. What had happened was that the CEOs had begun to compare themselves with the CEOs who had higher salaries and better benefits. The lower paid CEOs demanded more money and the companies were forced to give them an increase in salary or the CEOs would leave the company.

The book asked another question: "What would happen if the information in a company's salary database became known throughout the company?" The answer is a catastrophe. Because we compare ourselves with all people, all but the highest-paid individual in the company would feel underpaid.

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