'Lake Wobegon' effect to blame for spiraling CEO pay

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For pharma CEOs, keeping up with the Joneses isn't nearly as easy as keeping up with competitors' pay raises. That's because many drugmakers peg their executive compensation to the pay packages at other drugmakers, promising CEOs pay that's above the industry median. It doesn't take a mathematics expert from MIT to figure out that when companies continually pay above-the-median rates, the median rises, then pay rises, then the median rises again.

It's an approach that BNET Pharma's Jim Edwards has dissected before, and the Washington Post considers today. Amgen's Kevin Sharer is singled out for attention, because his $21.1 million in 2010 compensation puts him among the industry's highest-paid, while the company's $15.1 billion in revenue puts it in 11th place.

The above-the-median rule also applies to Johnson & Johnson chief Bill Weldon, perennially among pharma's top-paid CEOs: His $21.6 million in 2010 pay is more in line with the company's revenue ranking, but it came during a year when recalls repeatedly smacked J&J's treasured reputation for quality.

Setting executive pay by the compensation of peers divorces compensation from a company's actual performance, experts tell the Post. Weldon, for instance, did suffer a hit to his 2010 bonus, but not enough to knock him out of his place on our list of pharma's highest-paid CEOs.

This "Lake Wobegon" effect--where all the CEOs are above average--wasn't obvious until after the Securities & Exchange Commission forced companies to disclose more information about their executive compensation in 2006, the Post points out. But even now, when some companies have "say-on-pay" provisions allowing shareholders to vote on executive compensation, pay doesn't appear to be headed anywhere but up.

- see the Post's pharma CEO pay chart

Special Report: Top 10 Pharma CEO salaries of 2010

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