Then there’s what I call the “above-average effect.” Studies have shown that people, under most circumstances, tend to believe they are better than their peers on virtually all positive traits. That’s one of the reasons performance appraisals are often so contentious: The people getting reviewed all think they are above average, even if this is a mathematical impossibility. The same goes for CEOs and the boards of directors who hire and pay them. If you have supposedly above-average boards deciding on the pay of assumed-to-be above-average CEOs, then it must be the case that all CEOs have to be paid above average, right?
Finally, social psychologists have shown repeatedly that where you stand on the distribution of pay, rather than the absolute amount you are paid, determines its meaning. In other words, $2 million might seem like a perfectly reasonable annual compensation until it is viewed against one’s peers who are making $12 million or $22 million. As a result, ironically, the more discussion and disclosure there is of CEO pay, the greater the pressures grow to keep pay high. Who wants to admit to others — and least of all to themselves — that they don’t “measure up” in the rankings?