CEO Pay: The Prestige, The Peril

By Kerry J. Sulkowicz, M.D. At lunch in Manhattan not long ago, a well-paid chief executive asked me what I thought about the psychology of CEO pay. Why is everyone fixated on the topic? he asked. Does such hefty compensation, including his own, just come down to greed?

"I think there's more to it than that," I answered. In part, greed may account for these huge salaries and perks. But for some CEOs, high pay is also a status symbol, the currency of competition with other CEOs. Other chiefs expect big packages because they've internalized our culture's view of CEOs as celebrities or potential heroes. If Alex Rodriguez can make about $20 million a year with the Yankees (and not come through in the clutch), the thinking goes, don't CEOs deserve an extra zero or two?

I also know CEOs who view their pay not just as a reward for years of climbing the corporate hierarchy but also as an insurance policy, something to sustain them after their headliner days are over. (In this way, they're not unlike the sluggers who worry about life after baseball.) Fat packages represent their way of mitigating anxiety at a time when CEOs are assuming more risk and being fired more readily than ever before. And since money equals love for many people, why shouldn't that operate for CEOs, whose jobs often consign them to isolation and loneliness?

Since we're talking about the psychology of CEO pay, we should also look at compensation's impact on a chief's personality and on his board relationships. Superstar pay can reinforce latent grandiose tendencies in those so predisposed. A 2005 article by Washington University Law School professor Troy Paredes hypothesizes that high pay can contribute to a CEO's overconfidence--in the face of which, board members are likely to be more deferential and less able to spot bad business decisions.

I'VE ALSO encountered boards who are quite nervous about whether their CEO--especially one they've selected--will succeed. Using circular logic, they grant a big pay package to bolster their own confidence in the chief. A few CEOs actually feel uncomfortable with the high pay their boards urge them to accept. But given their directors' fear that lower pay might send the wrong message to the company or investors, they feel they can't afford the luxury of such modesty.

Now to why we care. CEO pay has never been higher, or as disproportionate to the pay of other workers, as it is now. So questions about what this means for others--investors and employees--are understandable. Still, greed's close cousin, envy, can disguise itself as righteous indignation in some quarters, where every downfall of a highflying CEO is secretly greeted with glee. All parties could stand a dose of self-awareness: Salivating bystanders might want to keep their envy and Schadenfreude in check. CEOs should reflect on the impact of their pay on their behavior. And directors should take a hard look at boardroom dynamics that may encourage pay decisions they later come to regret.


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