DAVID PEETZ. Why everybody knows CEOs are overpaid, but nothing happens.

That CEOs are overpaid is something, as Leonard Cohen would say, “everybody knows”; including the directors and shareholders who ultimately decide their pay. Yet firms are unwilling to do anything about it, because to do so would damage internal relations, undermine status and run against the norms of the system.  (This is a repost from an article first posted on October 24, 2015.)

Across Europe, the US and Australia,, four fifths of people believe business leaders in their countries are overpaid and/or that executive salaries should be capped.

In Britain, the head of the Institute of Directors said the “current rate of executive pay is unsustainable”. Several global business leaders have criticised “excessive compensation”. Paul Anderson, then retiring chief executive officer (CEO) of BHP Billiton, saw “no way to justify the incredible compensation” of CEOs.

An Australian survey showed a majority of directors considered CEOs were overpaid – yet boards of directors set CEO pay. In-depth interviews with non-executive directors brought out comments like “I don’t think any individual is worth that much”.

The retiring global CEO of Royal Dutch Shell conceded:

“if I had been paid 50% more, I would not have done it better. If I had been paid 50% less, then I would not have done it worse”.

This disaffection is founded in reality. From the mid 1980s, real executive salaries grew substantially faster than average real wages.

Yet that difference in growth rates has not always existed. In America, Britain and Australia, series on executive pay and average earnings tracked each other fairly closely through the 1970s and early 1980s; but from the mid-1980s they diverged. CEO pay helps explain the rise in top income earners’ share of national income, which in turn is only evident since the early 1980s.

Yet evidence shows the link between CEO pay and performance is often either negligible ornegative – though there is some evidence of a weak, positive link, but this may be only in particular periods, such as boom times.

The issue that bothers the public most, though, is not CEOs being out of line with shareholders (interested in performance) but CEOs being out of line with society. Even if a link existed between CEO pay and performance, this should not in itself create the recent pay divergence. There has not been the substantial improvement in economic performance necessary to explain it.

What then drives executive pay? This recent study shows several influences.

Size and asymmetry

The first is size. Large firms have greater power. Executives of larger corporations command more resources and have greater opportunities for “value skimming”, with “proximity to large flows of revenue and fees”; so high executive pay reflects “the advantages of position”.

The second key element is the unbalanced (“asymmetric”) nature of “bargaining”. Rather than having opposing identities to executives, the members of boards or committees setting CEO pay are from the same social milieu with broadly similar interests, precluding “arms length” bargaining.

As in all markets, supply and demand are relevant. But in labour markets for executives and directors, social norms are a critical institution. These norms can be summarised by seven behavioural rules.


First, the status of a corporation depends in part on the status, and hence pay, of its CEO. As Warren Buffett argues, “No company wants to be in the bottom quartile as far as CEO pay goes”. Firms like to have “celebrity” CEOs, and “celebrity” status may boost CEO pay, even though shareholder returns typically decline after a CEO reaches “celebrity” status.


The ability of CEOs to extract rents – “the extra returns that firms or individuals obtain due to their positional advantages”, is influenced by their social capital or networks. So CEO compensation includes a “social circle premium”, boosted by “golfing in the same exclusive club, sharing directors who understand the local pay norm and displaying luxury mansions”.

Being a CEO in a company well connected to other company boards increases CEO pay.

Women typically are less integrated into ruling class old boys networks, and this helps explain the substantial gender pay gap amongst executive directors and CEOs.


CEO pay is heavily influenced by comparisons. This is known as relative pay deprivation (or, as Buffett says, “envy is bigger than greed”). Executives typically believe they are above average and hence deserve to be paid above average. Many firms try to pay above average, almost no-one wants to pay below average.

Observers talk of the domino effect, the Wobegon effect (after a mythical place where every child is above average) or even the “Wal King effect”. When business lobbyists claimed that pay disclosure rules caused a surge in pay growth, they conceded the relevance of relative pay deprivation. There is statistical evidence of it in Australia.


Institutions emerge to help this asymmetric pattern bargaining. Leapfrogging happens with or without disclosure rules. Private institutions take advantage of relative pay deprivation concerns. Pay surveys, a recent development, create reference points for CEO pay. Remuneration consultants have gained prominence in the last three decades. They “are only seen to be doing their jobs if remuneration rises”. Remuneration committees on boards provide the appearance of independent review, setting “undemanding targets” while “ratcheting” pay.


The incentive structure of executive pay adjusts over time. It does this to minimise the risk that pay falls to match performance, to justify high growth and to deflect shareholder concerns.

There has been a major change in composition of CEO pay towards greater use of incentive pay. If this was just about aligning pay and performance, base pay would reduce as incentive pay increased, and total CEO pay on average would change little. Instead the growth of incentives has been central to the growth of total CEO pay.

The inflation of CEO pay, and its high level in the USA, has principally occurred through expansion of incentives. Incentives give the appearance of tying pay to performance and can mask its level as “only relatively few individuals with technical insight are able to understand what an executive is being paid”.

However, CEOs resist pay reductions. If incentive formulas would cut remuneration, then a restructuring of CEO packages (eg to increase the base or revise incentives) might prevent this. So a study of restructures of CEO pay packages found many amendments leading to higher pay, but no amendments if packages paid above expectations.


Different norms shape pay in different segments, though references will be made to other segments to justify increases. The general factors inflating US executive pay tend to be at work in Australia, but that does not mean Australian and US CEO pay are determined in a single global labour market. While beneficiaries have long used international comparisons as a justification for high growth, recruitment of Australian CEOs from overseas was not common.

Manufacturing workers’ pay varies less between industrialised countries than does CEO compensation. The 20 highest paid US CEOs received three times the average remuneration of their European equivalents, but on average ran smaller businesses by turnover. Cross-national differences in CEO pay are “an expression of deeper social values”, including differences in tolerance of inequality (including amongst economic elites) and acceptance of “market” outcomes (though everywhere, inequality is worse than people want or perceive).


The ability of CEOs to ratchet pay upwards is contested. CEO power to shape pay is constrained by several factors. These include: shareholder activists (including superannuation funds); actual or threatened legislation to impose limits on CEO excess; and popular resistance. These wax and wane.

After world war two, an “outrage constraint” would “limit executive paychecks”. But from the 1980s, financialisation and the move towards market liberalism shifted, increased CEOs’ capacity to extract rents and the size and visibility of finance executive rewards, setting new benchmarks for others to follow. The growing “gap between the rich and the super-rich” gave CEOs motivation to aim even higher.

A few years ago corporate Australia was engaged in “a race against time to persuade politicians not to intervene”. The subsequent “two strikes” rule forced them to ”adopt a more cautious and thoughtful approach“ that was seen as “a genuine tightening”.

So it’s not quite the case that “nothing hapens”. But it only “happens” for a while, until the fuss dies down.

A more extensive version of this, with full references, is published in the Journal of Industrial Relations

David Peetz is Professor of Employment Relations, Griffith University. This article first appeared in The Conversation on October 5, 2015.


John Menadue. CEO Pay in ASX 200 companies.  

In September 2015 the Australian Council of Superannuation Investors provided information on a ‘realised pay basis in FY14’. This includes the market value of shares and options. The ten highest paid CEOs were as follows:

Rank CEO Realised pay $ m. Reported pay $ m.
1 Chris Rex, Ramsay Healthcare 30.8 9.1
2 Peter & Steven Lowy, Westfield 24.4 22.1
3 Louis Gries, James Hardy 20.8 12.6
4 Andrew Bassat, Seek 17.9 4.2
5 Andrew Mackenzie, BHP 15.6 7.8
6 Colin Goldschmidt, Sonic Healthcare 13.4 3.8
7 Gail Kelly, Westpac 12.9 11.0
8 Ken Mackenzie, Amcor 12.7 8.4
9 Mike Wilkins, IAG 11.5 7.5
10 Nicholas Moore, Macquarie Group 11.4 13.1
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5 Responses to DAVID PEETZ. Why everybody knows CEOs are overpaid, but nothing happens.

  1. R D M Halliday says:

    Why not have potential CEOs tender for the job accompanied by a submission?

  2. Martin Braden says:

    Like real estate agents, head hunters are rewarded on a percentage of the emolument won by their successful candidate. therefore the remuneration consultant/headhunter has a vested interest in maximizing the pay required for the candidate they propose.
    This, in turn, can then be used to justify a raise in directors’ fees. Around and around the game goes and nobody playing can be a loser.Even the managers of institutional investment funds can benefit from the process, because of their relative rewards will otherwise fall behind. The losers are the lesser employees and the ordinary sharehoders.

    pay scales.

  3. Tony Vivian says:

    Economist Robert Frank offers a perhaps more elegant and compelling explanation for the astronomical salaries commanded by CEOs. He reasons that a winner take all business environment has evolved that has two characteristics.

    Rewards depend less on absolute performance than on relative performance, and that the rewards tend to be concentrated in the hands of a few top performers. Companies in such a market are willing to pay these salaries to gain the edge.

    He gives the example of a company earning $10 billion per year with two highly talented applicants for the CEO job. But one of which can increase earnings by say 3%. He argues that a miniscule talent difference would translate into an additional $300 million in earnings. He goes on to say that even if you paid the better applicant $100 million it would be a bargain….

    Frank Robert, Success and Luck 2016

  4. Robert Fox says:

    I suggest using a the concept of a ‘legitimate business expense.’
    To spend $1000 per head on a business lunch would not be a legitimate business expense, and so not tax-deductible. (Why should the lunch be a business expense anyway? Eating is not business unless you are a restaurant critic.) Similarly, excessive pay should not be tax-deductible over a certain amount.

  5. Dr John CARMODY says:

    This problem is not limited to public companies: it applies, as well, to most publicly-funded organisations, including universities.

    I remember my first Professor at UNSW, now deceased, who was a foundation Professor in the new Faculty of Medicine there. He said that, to the best of his recollection, when he was appointed, the Dean’s salary was 15% greater than a Professor’s, the Deputy Vice-Chancellor’s salary was 25% higher than a Professor’s and the Vice-Chancellor’s was 50% higher than a Professor’s. The first VC there, JP Baxter had faults, but venality was not one of them,. These days a VC earns 6-7 TIMES as much as a Professor does. Not only does this disttort their relative importance to the university, it also corrupts their attitudes: they are tempted to see their peers NOT as their academic colleagues, but as the corporate CEO’s in the CBD.
    By contrast, I remember when, some years ago, I was doing some research which involved looking at the records of the Royal Postgraduate Medical School in Hammersmith (in London) I saw an annual budget which specified that a Dean should be paid several hundred Pounds LESS, per annum, than a Professor there. I approve that declaration of values.

    The intellectual heart of every university comprises the students (undergraduates and graduate-students) and the academics: important as they are, administrators are not the quiddity of a university.

    Nor is the CEO the most important part of a company. In Germany, the Parliament has long recognised this thorough the Mitbestimmungsgesetz (the “Co-Determination Law) which provides that every public company with 2000 or more employees must have 50% of the Board elected from the staff; for companies of 500-2000 this figure if 33%. It is a legally-enforced recognition that a company consists of its employees — not its senior executives.

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