When Everyone is Above Average

In theory, transparency is always a good thing. However, the result might not be always what we expect. James Surowiecki [New Yorker, Oct 21st] explains why in terms of executive compensation, the result of knowing every executive’s compensation is an explosion in compensation packages. No executive will argue that his talents are just average –all executives, like all of us, will rationally present themselves as above average. Given compensation for an above-average executive is formulated to be naturally above the average of peer-group firms, the iterative result is an ever-increasing race to the top. Mr. Surowiecki suggests that boards of directors would be better served by thinking about an executive’s own contributions and performance, and then determine what level of compensation is warranted.

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