The compensation of most CEOs of Fortune 500 companies is based on that of a peer group, other CEOs who, in theory anyway, manage similar companies. Many observers do not think this is a good idea and tends to artificially inflate the CEO's compensation. A study by two professors from the University of Delaware, Charles Elson and Graig Ferrere, agrees.
They argue that the idea of the peer group assumes that a CEO's skills are readily transferable to another company. They cite a number of studies which do not support the idea of CEO transferability; they think a company will be better off by hiring from within.
They contend that successful CEOs are often successful because of the
people around them, and to the extent that their individual
contributions matter, they are often specific to their companies.
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