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CEO pay, part II

If you read my previous post on CEO salary cap, check out Jim Manzi‘s thoughts. Also, Felix Salmon and Megan Barnett debate the pay cap (he is in favor, she against). After Salmon presented his case I’m inclined to be less charitable to Barnett than I was before. But this post by Bob Sutton seals the deal:

The results still amaze me: After controlling for traditional size and performance measures, the amount of money made outside directors, especially those on the compensation committee, had a huge effect on CEO pay. O’Reilly and his colleagues report that for every $100,000 that the average member of the compensation committee is paid, the CEO’s pay goes up another $51,000 per year. Remember, these effects are independent of firm performance and size!
There are two lessons here. The first, as is well-documented, that there is little relationship between what CEOs get paid and firm performance, other — less rational — factors overwhelm it….

It is a documented social science finding that the more intelligent tend to hue more closely to the ideal of H. economicus. But just because smarter people are more rational does not mean that they are very rational (humans being a very irrational beast). Here’s another nugget about CEOs you probably know about:

A survey of Fortune 500 CEO height in 2005 revealed that they were on average 6 feet (183 cm) tall, which is approximately 2-3 inches (7.5 cm) taller than the average American man. Fully 30% of these CEOs were 6 foot 2 inches (188 cm) tall or more; in comparison only 3.9% of the overall United States population is of this height.[6] Equally significantly, similar surveys have uncovered that less than 3% of CEOs were below 5′7″ in (170 cm) height. Ninety percent of CEOs are of above average height..

It could very well be that some of this is due to the fact that taller males are more self-confident. But I still think it works against the hypothesis of an efficient market in CEO pay based on their cognitive aptitudes. Of course I wouldn’t be surprised if shareholders get nervous having a midget CEO as the face of the company….*
* Another model might be that all things but height equal a taller man always has a marginal advantage climbing the corporate ladder. Since many CEOs have gone through many iterations of the promotion game, it might that the frequency of tall candidates increases on each level.

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