The idea behind setting executive pay this way, known as “peer benchmarking,” is to keep talented bosses from leaving.
But the practice has long been controversial because, as critics have pointed out, if every company tries to keep up with or exceed the median pay for executives, executive compensation will spiral upward, regardless of performance. Few if any corporate boards consider their executive teams to be below average, so the result has become known as the “Lake Wobegon” effect…
‘All the other kids have one’
The gap between what workers and top executives make helps explain why income inequality in the United States is reaching levels unseen since the Great Depression.
Since the 1970s, median pay for executives at the nation’s largest companies has more than quadrupled, even after adjusting for inflation, according to researchers. Over the same period, pay for a typical non-supervisory worker has dropped more than 10 percent, according to Bureau of Labor statistics.
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