June 26, 2006

CEO Salaries

I had the bright idea to live-blog Saturday's Columbus Dispatch, giving my opinion on many of the articles contained therein. This exercise in hubris wasn't accomplished not on account of my realizing it was an exercise in hubris but because of the hard work involved. I laid down until the desire to blog went away.

But one article caught my eye. CEO pay is up to something like 242 times the average worker's pay. And I find it hard to have a problem with it. I look at the modern corporation as a glorified lottery scheme. There can only be one chief, but many of the Indians want to be that chief and so fueled by that ambition they play the corporate lottery. I say pay the guy well and there'll be hard-working individuals wanting that job (or jobs close to it) and that will only help the company and therefore the economy. Certainly even if the corporation isn't a meritocracy (i.e. see The Peter Principle) it's more so than a straight lottery.

Execs play an increasingly dominant role in the business world. A few generations ago you could basically rest on your laurels if you were a big company. Now you have to constantly innovate, diversify your portfolio, make quarterly earnings numbers, etc. A CEO can make one bad decision - say, hypothetically, you acquire a company and that company becomes a sort of East Germany to the rest of the company's West Germany. The result is that that decision swamps in importance all the individual decisions the indians made over the course of the year. Ten thousand indians can make good decisions but the helmsman can still crash them on the rocks.

So you say "why can't the CEO be paid 141 times the average person's pay instead of 242 times?". Good point, except I've always been fascinated by what happens with the Ohio lottery. When the jackpot falls to say $4 or $6 or $8 million, there are less players. When it's up around $15 or $20 million, there are many more. Why? The difference between four million dollars and twenty million dollars is miniscule to the average person. Four million dollars is plenty, isn't it? But no, people are making decisions based on it. So maybe 141 times the average pay really isn't as attractive as 242 to the high performers.

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