CEO Pay II: A Speculation

by Don Boudreaux on May 28, 2004

in The Economy

Why is the value attached by the market to CEO skills so high? Part of the reason might be that material wealth is today so abundant and widely available that access to distinctive species of material wealth is disappearing.
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CEOing is not easy. Successful CEOs possess great skill at motivating many different people, at polishing and maintaining an effective management structure, at mastering financial matters, at comprehending relevant technical issues concerning a company’s production processes and product lines, at grasping the extant and often-changing legal and political terrain – not to mention shouldering the enormous responsibility of being in charge of assets worth billions of dollars and that are unceasingly battered by fierce market competition.

This skill set is much more rare than most people suppose it to be. Therefore, competition among firms for management talent drives CEO pay to extraordinarily high levels. But why so high? Can’t a CEO be satisfied with, say, $25 million annually rather than $50M or $100M?

Most of us earn nothing near these sums; therefore, it’s near-impossible for us to imagine the difference between an annual salary of $25 million and $25 billion (much less than between $25M and $50M).

But because incredible material riches are increasingly available even to Americans of modest incomes, it’s a mounting challenge to entice someone fortunate enough to possess CEO skills to work like a dog at exercising these skills and to endure the anxiety and pressure that CEOs must endure. How to entice?

Money, of course, is always a chief enticer. But because even middle-class Americans can today travel around the world, buy homes with automatic dishwashers and vaulted ceilings and swimming pools, drive cars never break down, wear clothing that is indistinguishable from that worn by Bill Gates, J.K. Rowling, and other gazillionaires, eat fresh strawberries in January – the amount of money necessary to entice someone with rare and valuable talent to put that talent to use is enormous, especially if the setting in which that talent is to be exercised is infused inevitably with unending pressure and anxiety.

More specifically, if struggling ABC Corp. wants to attract Mr. Successful CEO away from his current post at now-smoothly-running XYZ Corp., or lure a promising V-P to tackle the greater responsibilities of CEOship, the marginal increase in salary must be enormous in order to enable the new president to enjoy a noticeable increase in his or her material standard of living.

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