FORT WORTH - Far from noisy protests spreading from Wall Street to Dallas and beyond, TCU finance professor John Bizjak quietly studies a source of some of the frustration over income inequality: The way corporations pay top executives.

[Average pay for executives of large companies is] around five or six million [dollars.] That's the average, said Bizjak, who holds a Ph.D., and focuses on corporate governance.

His research got national exposure in a recent Washington Post report. It shows that about 90 percent of America's largest 1,500 companies primarily base CEO pay not on performance, but on what other CEO's make. It's called peer benchmarking.

It mechanically causes a ratcheting up, Bizjak said.

He said corporate boards keep raising executive pay to keep up with other companies, which in turn raise pay to keep up, even sometimes when performance goes down. Data exposing the extent of benchmarking wasn't available for researchers to study until 2006, when new rules required companies to explain executive compensation.

The economic explanation is that CEO's are running bigger firms, so the CEO decisions have a much bigger impact, Bizjak said.

The professor understands companies needing to keep incentives high to retain good talent. Bizjak said what he found discouraging was the number of firms that compare themselves to bigger firms in order to justify higher compensation.

Some companies are gaming the system, he said. They're making the argument you've got to pay the CEO at median or above, then you look at the CEO's record and it's not very good.

He said peer benchmarking and its abuse help explain why CEO salaries have risen, despite flat wages and high unemployment.

But Bizjak also offers this caution: People are frustrated, so they want to cap pay or regulate pay, but there's always secondary effects, or the law of unintended consequences. Like prohibition.


Read or Share this story: