Why are private boards putting more value on the efforts of top managers than comparable public companies?  With no doubt there have been compensation structures for CEOs that were neither aligned with the interest of the shareholders or other stakeholders in the corporation.  However, the comparison between the pay at the top of the organization and that at lower levels really misses the mark.  This comparison just happens to be simple to calculate, easily understood and highly contentious.

The true value of a CEO is her ability to improve the value of the company.  The best way to measure this is to compare the value increase to other similar companies in order to remove the value increase or decrease that impacted all companies in the sector.

The cost of the CEO should be market driven with significant portions based on performance.  What is the market rate for a CEO with these skills and necessary experience?  Just as the top performers in movies or baseball games are paid many multiples the salary enjoyed by their peers due to the short supply of “stars”, CEOs are short in supply as well.

What is surprising here is that private companies with active investors on their boards are offering higher compensation for these talents than the generally less active boards of public companies?  I would suggest that the backlash of the “compensation scandals” have the compensation committee of public companies swinging too far in the conservative direction. The swing was needed, let’s hope it does not continue so that public companies become the minor league training camps for CEO destined to play in the private company major leagues.
Public CEOs take to private firms in order to get top dollar as shown in Private Firms Lure Chief Executives With Top Pay – New York Times