Who are my peers?

That's a question CEOs of big companies ask when it comes time to set their compensation for the year.  The compensation committee answers the question for the CEO.  Of course, they want to fairly evaluate the CEO's performance.  How better than by comparing the CEO to CEOs who run similar companies?  

The problem is that the board, most of whose members owe their appointment to the CEO, has a problem defining peers.  Many boards define peers that are quite larger than their company or are in different industries.  Larger companies tend to pay their CEO more than smaller companies do.  Some industries have a higher pay scale than others.  So, you can see that the board, by selecting the 'right' peers, can easily gimmick the situation so that the CEO is paid more than he's worth.  For example, CBS paid its CEO $69,000,000 after the board discovered that the company's peers were on average more than twice as large as CBS, and many in businesses far afield from media. 

Basing the CEO's pay on peer companies is one of the reasons why the adjusted average compensation of CEOs in the S&P 500 (SPX) rose to $12.9 million in 2011, or 380 times the average worker’s pay, up from $625,000, or 42 times the average worker’s pay, in 1980.