Wednesday, July 1, 2009


Are CEO's paid too much? I have done hardly any research on this topic, but it's interested me since teaching a section on it in a Business Ethics class last fall.

The main insight I gained then was the similarity between the inflated pay of CEO's and star athletes. There's been a rapid rise due to a small minority of shareholders/owners overpaying for a few CEO's/athletes, which has inflated the competitive value for similarly skilled CEO's/players. This ratcheting system doesn't seem financially justifiable for two reasons: (1) top CEO's/players today probably aren't 10 times more valuable than top CEO's/players from 50 years ago; and (2) top CEO's/players probably aren't 100 times more important to their organization than the average employee/player they work with.

Let me own my ignorance, though: I took most of this on the word of one of the two articles our class read from a bad textbook, so my confidence in this analogy has been low.

Still, I read an article recently that partly confirmed my diagnosis that the root cause of the increase in CEO pay is the ratcheting from unrepresentative "peer-group comparisons" of similarly qualified CEO's at other companies. For some reason, overpaid peers stand out more. (Unfortunately, the article reads like a press release from a lobbying organization. That automatically makes me skeptical.)

Robin Hanson, however, makes a different case for the wage inequality. He compares CEO's to actors and musicians by focusing on the high cost of trying out new CEO's, along with the prevalence of short-term deals. The few short-term winners renegotiate at much higher terms, and are free to continually renegotiate their salaries into the stratosphere. Hanson suggests agreeing to more long-term deals at the beginning to help solve this problem.

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