Just a hired hand getting his just reward

Tyler Cowen, economist and co-author of the interesting and valuable econ blog Marginal Revolution, takes a contrarian position on CEO compensation in his NYT article, A Contrarian Look at Whether U.S. Chief Executives Are Overpaid. He cites a paper recently published by economists Xavier Gabaix and Augustin Landier.

Their core argument is simple. If we look at recent history, compensation for executives has risen with the market capitalization of the largest companies. For instance, from 1980 to 2003, the average value of the top 500 companies rose by a factor of six. Two commonly used indexes of chief executive compensation show close to a proportional sixfold matching increase (the correlation coefficients are 0.93 and 0.97, respectively; 1.0 would be a perfect match).

Cowen does not discuss what has happened to the average worker’s compensation during this same time period. Without looking it up, I’d bet that it did not rise by a factor of six.

One theory says that CEOs are merely hired hands increasing shareholder value for their shareholders. If compensation is dependent on shareholder value, doesn’t that apply to the other workers also?

Published in: on May 18, 2006 at 10:24 am  Comments (1)  

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One CommentLeave a comment

  1. Your post evokes a thought that has come to mind over the last year whenever I hear how well “the American economy” is still doing.

    As the rich get richer and the poor poorer, how well “the economy” is doing becomes an abstraction increasingly unrelated to how well the nation as a whole is doing.

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