CEO Pay I: The Easy and Uninteresting Answer

by Don Boudreaux on May 28, 2004

in The Economy

Executive compensation has long been a favorite topic of the economically illiterate. The man in the street and the pundit in the papers never weary of discoursing on how obscenely excessive is the pay of CEOs. (Similar objections are aimed at the pay of superstar athletes, although, mysteriously, not at that of superstar entertainers. See Allen Sanderson.)

The most-obvious response is that CEO pay is set by market forces. Because there’s no reason to assume that shareholders generally extend charity to high-level employees of their firms, there every reason to assume that CEOs’ salaries and bonuses reflect as accurately as possible their market values.

On the policy question of whether or not government should intervene to limit CEO pay, the answer is radiantly clear to anyone who knows some economics: no. It isn’t even an interesting question.

The more-interesting question is why the value attached by the market to CEO skills is so high. I will speculate in a later post on what might be a part of the answer. My speculation will rely upon the observation that the consumption abilities of very wealthy Americans is increasingly less distinct from the consumption abilities of ordinary Americans.

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