CEO pay — VOICES for REASON

In a delightfully written column for the Wall Street Journal, Holman Jenkins observes that baseball great Derek Jeter’s salary showdown has provoked none of the public outcry we inevitably hear when a CEO makes a lot of money. My favorite part:

Absent from the Jeter controversy has been envy or raillery about the horrors of income inequality. Absent has been the lethargic assumption that national income is a fixed sum, so more for Mr. Jeter means less for schoolteachers. Absent has been the psychological malady that, in a world not short of injustices, causes sociology professors to lie awake obsessing over the difference between their incomes and those of other people.

Said one fan on a New York paper’s website: “As far as the money is concerned, I really don’t care what they pay him. It’s not my money.” If it were catching, this healthy-minded attitude toward the paychecks of our fellow man would make the world a better, happier place.

There’s a lot to say about why the relatively high pay of superstar CEOs is reviled while the relatively high pay of superstar sports figures and celebrities is tolerated and even cheered.

One reason for this double standard is simply that few people have a clear idea of what it is a CEO does. We all can see what makes Jeter great (well, those of us who aren’t Red Sox fans), but just what does Larry Ellison do–and why can’t Oracle’s stockholders find someone to do it more cheaply?

I’ve often thought that a reality TV show based around a successful CEO who is not Donald Trump would go a long way toward remedying this problem. But, alas, it would not go all the way, for reasons I explain in my article (co-authored by Yaron Brook) “The Corrupt Critics of CEO Pay.”

image: flickr/keithallison

In my last post on CEO pay, I pointed out that undeservedly high pay for executives would not be a problem on a truly free market, where CEO pay is undistorted by government intervention, as it is today. Nevertheless, there are real challenges in setting CEO pay, challenges that would exist even in a free market. But this is an argument for free markets and against regulating CEO pay. Here’s why.
Read the rest of this entry »

Megan McArdle, liveblogging from the Berkshire Hathaway shareholders meeting, reports that Warren Buffet was asked about executive compensation. Buffet gave his usual answer: that CEOs are able to nab undeservedly high pay packages from pliant compensation committees. But Megan points out, there’s a problem with this narrative: Read the rest of this entry »

In the debate over pay caps for bailed out bankers, we’ve been offered a seemingly unresolvable conflict: On the one hand, the government has no right to dictate CEO compensation. But on the other hand, is it really fair for CEOs to be paid whatever their boards want to give them when they are being paid with taxpayer bailout dollars?

As Ayn Rand pointed out, “You may take it as a general rule: whenever an issue leads to an unresolvable conflict, you will find, at its root, the violation of someone’s rights.”

Clearly, the problem is the bailouts themselves.

In a private company, the CEO should get paid whatever shareholders judge will be best for the company’s bottom line, based on their assessment of the relevant market factors. But the CEO of a nationalized or semi-nationalized company? Who should decide his pay? By what standard?

As Austrian economists pointed out decades ago, there is no rational answer to these questions. The decision of how to compensate executives–and, ultimately, every business decision–inevitably stops being profit-driven and becomes politically driven. The question is no longer, “Will a bonus be a boon to our bottom line?” It’s, “Will this satisfy the boys in Washington?”

What we need to cap is not CEO pay, but government power. It’s time to end the government’s ability to take over private businesses. Then shareholders can pay what they judge to be necessary to retain and motivate their CEOs. And if they pay a lousy CEO big bucks, they–not American taxpayers–will be the ones to lose out.

Yaron Brook participated in a debate on CEO pay at BusinessWeek.com. The question was, “President Obama’s proposed salary restrictions for banking executives are a good idea for all of Corporate America. Pro or Con?” Needless to say, he took the con position. Money quote:

Shareholders have a moral right to pay whatever they judge necessary to attract, retain, and motivate talented leaders.

Entire piece here.