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Mindin’ Other People’s Business Seems to Be High-Tone….

Here’s a letter to the Washington Post:

Let’s say that Robert Samuelson is correct that today’s CEOs are likely overpaid (“The CEO aristocracy: Big bucks for the big boss,” June 23).  So what?  These overpayments are made voluntarily by corporate shareholders, each one of whom is free to easily sell all of his or her shares in any corporation that that shareholder believes is overpaying its CEO.  Politicians, newspaper columnists, best-selling French economists, and the general public have no more business fretting about whether or not private corporations overpay their CEOs than they have fretting about whether or not the families down the street overpay their babysitters.

But if we must wallow in such busybody-ness, it becomes important to recognize that the evidence of CEO overpayment isn’t as clear as Mr. Samuelson suggests.  Writing last year in Foreign Affairs, University of Chicago finance professor Steven Kaplan reported that when he and co-author Joshua Rauh analyzed 1,700 firms they “found that compensation was highly related to performance: the companies that paid their CEOs the most saw their stocks do the best, and those that paid the least saw their stocks do the worst.”*  This fact – combined with the typically overlooked reality that no one is forced to buy or to hold corporate stocks – is strong evidence that patterns of CEO compensation are the results of legitimate and productive market forces.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

* Steven N. Kaplan, “The Real Story Behind Executive Pay,” Foreign Affairs, May/June 2013.

(I again thank University of Chicago law professor Todd Henderson for alerting me to Kaplan’s Foreign Affairs essay.)

For those of you who read Robert Samuelson’s WaPo column linked above, note some other uncharacteristic errors of reasoning that he makes there.