“So why, exactly, did CEO pay skyrocket, even though these top executives may have made no direct economic contribution to the growing values of their companies? One theory is that CEOs play large roles in appointing their corporations’ directors, for whom a reliable tendency toward agreeing with the CEO has become a prerequisite. Directors are amply paid for the three or four times a year they meet and naturally want to remain in the good graces of their top executives. Being a board director is the best part-time job in America. In 2012, the average compensation for a board member at an S&P 500 company was $251,000. In addition, boards consist of other CEOs who have considerable interest in ensuring their compatriots are paid generously. To advise on executive pay, boards typically hire people euphemistically called “compensation consultants”, whose actual roles are more akin to that of the oldest profession in the world. Such consultants typically establish benchmarks based on the pay of other CEOs, whose boards typically hire them for the same purpose. Since all boards want to demonstrate to their CEOs as well as to analysts on Wall Street their willingness to pay generously for the very best, pay packages ratchet up annually in this faux competition, conducted and directed by CEOs for CEOs, in the interests of CEOs.Corporate law in the United States give shareholders at most an advisory role on CEO pay. “Say on pay” votes are required under the 2010 Dodd-Frank financial legislation, but the votes are not binding on a corporation.”
Given this picture so well described by Reich, we can understand that the free market for CEO pay has been co-opted by the closed market system of compensation consultants and committees. This cronyism in the American Board Room has been present for decades and has resulted in huge increases in executive pay, while workers struggle.