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Saturday, September 06, 2008

Kill the Cult of the CEO

If we keep bailing out huge corporations can we please stop pretending that corporate CEOs are paid so much more than the rest of us mere mortals because they are such epic-scaled risk-takers?


Martin said...

Markets experience bubbles. What we are in, hopefully, is a CEO salary bubble. I think a backlash is already beginning among shareholders to limit exorbitant compensation packages.

eyu said...

"The furor over CEO compensation intrigued Xavier Gabaix, 36, a French-born and Harvard-trained economist who now teaches at New York University’s Stern School of Business. He and fellow Stern economist Augustin Landier decided to investigate whether corporate bosses were, in fact, “overpaid.” They tested a variety of possible explanations for the recent spike in executive rewards, and came to a conclusion that may surprise the populist scourges on Capitol Hill.

As Gabaix and Landier write in a new Quarterly Journal of Economics article, the sixfold increase in American CEO pay from 1980 to 2003 is almost wholly explained by the roughly sixfold increase in market capitalization of big U.S. companies over the same period. (Asset values have increased sixfold because both corporate earnings and the price-to-earnings ratio investors are willing to tolerate have increased by factors of 2.5.) The trend lines of market capitalization and executive payouts rose and dipped in near-perfect tandem.

According to Gabaix and Landier’s model, the talent differences among CEOs are generally minor. For example, if a given firm substituted the most talented CEO for the 250th most talented CEO, its market capitalization would only increase by 0.016 percent. But for a $500 billion company like ExxonMobil, 0.016 percent is equivalent to some $80 million. In other words, as companies get bigger, a talented CEO can have a greater impact. Therefore, large companies bid up prices across the board for the small number of men and women deemed capable of managing them. The reason CEO pay in other countries (such as Germany) tends to be lower is that the “big” companies abroad are generally smaller than the big companies in America. We do not yet have a global market for CEO talent." (emphasis added)