Amgen didn’t do terribly well under CEO Kevin Sharer last year—it eliminated some 2,700 jobs and its stock fell 3%. Yet Sharer pocketed a 37% raise, bringing his compensation to $21 million. Why? Because the board decided he should be paid “closer to the 75th percentile of the peer group.” It’s a common story in corporate America, the Washington Post laments. Almost all CEOs are paid by “peer benchmarking”—a move companies ostensibly take to keep top-notch execs from quitting—and it’s made executive pay quadruple since the 1970s.
Paul Volcker once derided the phenomenon as “Lake Wobegon syndrome,” after the Garrison Keillor bit about a town where “all the children are above average.” Indeed, since late 2006, a whopping 90% of US companies decided to pay their CEO at or above the median for their peer group. What’s more, many companies choose “peers” who are much larger, goosing their figures. No one complains, because boards and CEOs are cozy; one survey found that the average CEO considers 50% of his compensation board members as “friends.” (Read more executive compensation stories.)