CEO Pay

So the article we're reading for class argues that the root cause of the increase in CEO pay is the ratcheting from unrepresentative "peer-group comparisons" of similarly qualified CEO's at other companies. For some reason, overpaid peers stand out more.

This highlights the similarity between the inflated pay of CEO's and star athletes. There's been a rapid rise due to a small minority of shareholders/owners overpaying for a few CEO's/athletes, which has inflated the competitive value for similarly skilled CEO's/players. This ratcheting system doesn't seem financially justifiable for two reasons: (1) top CEO's/players today probably aren't 10 times more valuable than top CEO's/players from 50 years ago; and (2) top CEO's/players probably aren't 100 times more important to their organization than the average employee/player they work with.

Economist Robin Hanson points out a recent paper that extends this analogy between CEO's and athletes. He also compares CEO's to actors and musicians by focusing on the high cost of trying out new CEO's, along with the prevalence of short-term deals. The few short-term winners renegotiate at much higher terms, and are free to continually renegotiate their salaries into the stratosphere. Hanson suggests agreeing to more long-term deals at the beginning to help solve this problem.