Pigs, pigs, pigs
Over at Junius, Chris Bertram briefly notes an article in Capitalism magazine criticizing Forbes and Fortune for giving in to the "socialistic" idea of reducing CEO pay. The Capitalist magazine rehearses a familiar idea: CEOs are like movie stars or athletes. Extraordinary pay is necessary to attract talent. This argument is a foolish disguise for a situation that is anything but laissez-faire. Movie stars and athletes commoditize an impression. If you go to a movie because you like x, or a basketball game because you like y, then x and y have successfully extracted a certain amount of money from you -- which is why they are paid the prices they are paid. Winning is nice, but a star on a NY team that doesn't win a championship will probably make more than a star on a team from North Carolina that does, because of the economics of the above. CEOs aren't in the impression business, give or take Oprah and Martha. Nobody bought GE products because of Jack Welch. There are moments when equities depend on name CEOs -- when they are hired, or when they leave -- but these are epiphenomenal events.
The star analogy simply disguises a traditional inefficiency in the job market. This inefficiency has been created in the traditional way: a guild exists, composed of CEOS, who protect each other's compensation. CEOs usually make up the compensation committees that decide CEO salaries. As long as this continues, CEOs will be grossly overpriced. The effect of that overpricing is disguised by various dodges to make it look like CEO compensation is not a cost to the firm. It is a cost to the firm.
There's no magic here.
So, what does LI suggest? The problem could be solved in two stages. First, the compensation committees cannot be composed of CEOS. Second, saving money to the firms all around, the compensation experts who will take the place of the bigwigs don't really have to be paid more than twenty bucks an hour. Why? Because really, CEO compensation could be determined pretty much by computer program. To make this program, take the list of the CEOs of the Fortune 500. Find those with the lowest total compensations. Use them as your anchor points. Mixing a set of variables that track company performance against those salaries, you create something like a career series. Then plug in the CEO candidate. Track his performance at other companies against your base performance rates. Depending on how the candidates do, you allot extra compensation -- or you subtract it. Because certain sectors might be special, your anchors could be shifted to these sectors -- but the standard would always be the lowest paid CEO. Presto chango, you have an objective compensation program that plugs in competition. The rises in CEO pay that might come as the bottom level rises will be compensated for by new companies which appear, setting new standards.
The CEO salary then becomes a standard for other higher exec compensation. Crazy, huh?
Simple or what? And I give it to the world free. Cause I'm such a nice guy.