To Absolutely No One’s Surprise, Directors Think they Are Doing Fine in Setting CEO Pay

We are shocked, shocked, at the findings of a completely superfluous new study showing that directors think they are paying CEOs fairly because it is a really, really challenging job.

Fortune 250 directors strongly agree that CEOs in their industry have “specific skills that are extremely hard to replicate,” rating this statement a 7.5 on a scale of 1 to 10 (with 10 indicating that it completely reflects their point of view and 1 indicating that it does not at all reflect their point of view). They also believe that both general management expertise and industry expertise are “critical for being a successful CEO,” assigning these scores of 9 and 8, respectively. Furthermore, they believe having top talent is critical for their company’s overall success, agreeing that “it is impossible to be the top company in our industry without having the top CEO in our industry” (7 on a scale of 1 to 10).

At the same time, many admit that it is not easy to evaluate CEO talent. On average, directors believe that “it is difficult to evaluate prospective CEO talent during a search process because a candidate might meet all the criteria in terms of previous work experience but it is still hard to tell whether he or she would be a successful CEO” (7 on a scale of 1 to 10 – see Exhibit 3).
One respondent explains that, “CEO talent is very difficult to identify by resume, particularly for mega-cap companies.” Another believes that, “It is hard to judge talent before it is challenged.

Many can run a company if things are going well and the economy is healthy. The real test is when things aren’t going well and the economy is not supportive.” According to another, “Even internal candidates can deviate from expectations once they are in the big job.” [footnote omitted]

We respectfully suggest that the time of the researchers would be better spent in examining pay/performance links and the impact of specific incentive compensation approaches than the self-reported, self-justifying subjective responses of the very people who approve the pay.

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