Why C.E.O.s are like a bottle of wine

I’m a great fan of situations where people try to make the world a better place only to find their efforts backfire. It really gives me a chortle!

The new New Yorker (October 21st, 2013) has a piece on its “Financial Page” which stands as a good example. As we all know, there’s been a rising disparity in the amount of money corporations pay their average worker compared with what they pay their C.E.O.. Modern C.E.O.s earn about 270 times what the average worker earns! As a result, the S.E.C. has put in place various laws making this disparity public. The idea being that company boards would respond to public outcry and shame over the pay rates.

However, things haven’t worked out as planned. These transparency laws illuminate not only to the public what C.E.O.’s are making, they also illuminate to the boards of companies what their competitors’ C.E.O.s are making, thus generating a bidding war! There are several reasons for this, but this one gets at the psychology behind it all.

…Elson said, “If you pay below average, it makes it look as if you’d hired a below-average C.E.O. and what board wants that?”

We tend to be uneasy about bargaining in situations where the stakes are very high; do you want the guy doing your neurosurgery, or running your company, to be offering discounts? Better, in the event that something goes wrong, to be able to tell yourself you spent all you could. And overspending is always easier when you’re spending someone else’s money.

In essence, board members are thinking, “This guy probably isn’t worth 100 million a year… but what if I’m wrong?”

This reminds me of a study which argued that people enjoy more expensive wine because it’s more expensive.

…researchers at Stanford and Caltech have demonstrated that people’s brains experience more pleasure when they think they are drinking a $45 wine instead of a $5 bottle – even when it’s the same stuff.

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