Economics, Political Theory, politics, US Politics

CEOcracy: A CEO’s marginal contribution to welfare.

Most people stopped believing that superstars simply earn their marginal contribution to welfare. Moreover, most people believe the fact that they do usually earn more than their marginal contribution is a consequence of a specific market setup, or, simply put – a kind of “market failure”.

However, John Snow, the US Treasury Secretary, when asked about the excesses of American CEOcracy, used “superstar economics” as a justification for widening gap in labour compensation (referring only to the US).

“What’s been happening in the United States for about 20 years is [a] long-term trend to differentiate compensation,” Mr. Snow said… “Look at the Harvard economics faculty, look at doctors over here at George Washington University…look at baseball players, look at football players. We’ve moved into a star system… Across virtually all professions, there have been growing gaps.”

Mr. Snow said the same phenomenon explains why compensation for corporate chief executive officers has climbed so sharply. “In an aggregate sense, it reflects the marginal productivity of CEOs. Do I trust the market for CEOs to work efficiently? Yes. Until we can find a better way to compensate CEOs, I’m going to trust the marketplace.” (source: WSJ)

Well, it is true that the marginal productivity of a CEO is not easy to measure, certainly not in financial terms (just as the one of the guy sweeping the floor, except in m2 per time unit) – but to argue that the market price is de facto a fair valuation thereof strikes me as a rather problematic position, given everything we know about markets and particularly in light of the next sentence in the WSJ’s article…

Since the 1970s, CEO compensation has gone from 40 times to more than 300 times the average worker’s salary.

That’s quite some executive productivity increase, don’t you think? (via Economist’s View)