June 19, 2025

The Unintended Rocket Fuel for CEO Pay: It's Not Greed, It's the Mirror

The article was generated from the video transcript and edited by Dr. Hermann J. Stern.

Ever wonder why CEO compensation seems to defy gravity, often reaching stratospheric levels that leave many scratching their heads? The standard narrative usually points a finger at executive greed or board complicity. But what if the engine driving this upward spiral is something far more systemic, something we might all unknowingly participate in?

In this eye-opening video excerpt from a recent lecture at the University of St. Gallen, Dr. Hermann J. Stern delves into a fascinating exercise he conducted with his students of the master program at the University of St. Gallen, HSG. It reveals the surprising culprit of high CEO pay levels: CEO pay benchmarking.

Forget the image of cigar-chomping executives demanding ever-larger sums. The reality, as we discovered, is far more nuanced and rooted in a seemingly logical process. When tasked with setting the salary for a newly hired CEO - a highly qualified candidate, no less - the students, armed with real-world benchmarking data, inadvertently replicated the very phenomenon we see in the market.

The initial median pay for a comparable company was presented, along with the typical ranges. What happened next was both predictable and deeply insightful. As each student made their offer, a new "market" rate emerged, and guess what? The median pay increased by more than 20%! Even more surprisingly and not necessarily unwelcome, the lower end of the pay scale saw the most significant jump.

This simple yet powerful exercise demonstrates a crucial point: the act of pay benchmarking itself injects upward pressure into CEO compensation. Boards, tasked with attracting top talent, naturally look at what comparable companies are paying. Driven by a desire to be competitive and secure the best leader, they often err on the side of generosity, nudging the benchmark higher with each new appointment. It's not necessarily about individual avarice; it's about a collective response to market data.

As the lecture highlights, this "wage anchor effect" is surprisingly resilient. Even individuals with strong numerical skills aren't immune. Interestingly, research suggests that women tend to be less susceptible to this upward pressure, offering more moderate initial salaries.

This video unpacks this critical dynamic, using the student exercise as a clear and engaging illustration. You'll witness firsthand how easily and unintentionally we can contribute to the spiraling CEO pay simply by relying on benchmarking data.

If you've ever questioned the logic behind ever-increasing CEO compensation, this video offers a compelling and unexpected answer. Understand the hidden mechanism at play and why "following the market" can inadvertently inflate the very market you're trying to navigate. Click play in the video above to unlock this crucial insight and rethink the next time you hear about CEO pay benchmarks.