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Baseball players are workers; CEO's are bosses, and therefore must be capitalists. Those who earn wages are poor and those who earn "profits" are rich. It's that old set of economic theories that conflate the distribution of managerial authority with the functional distribution of income with the personal distribution of income. Zombie ideas, that have been undead since 1871.

Nick:

The criticism of CEO pay is not the amount really - few argue that the CEO of Apple should not earn a lot.

The criticism centers around widespread, well documented excesses: CEO bonuses in the millions while the company is being driven into the ground or is getting a bailout.

Athlete performance is measured in a very direct way and there's no tradeoff between short term and long term performance.

Hence the public sees the pay of athletes as fair and deserved - while the pay of Enron, Lehman and BoA executives is seen as outrageous. That is not a zombie idea.

A classic example of not seeing the forest for the trees. What is more important is wealth inequality and the power inequality it breeds. While salaries are a factor in that, they aren't necessarily a major factor simply because many people who are paid high salaries don't often receive them long enough to accumulate a lot of wealth. Professional athletes are a perfect example of this. While a certain percentage do have lengthy careers at the top, the majority only last a couple of years.

Also I can't help notice that you didn't make any mention of the role of unions in this. Many professional athletes in sports that pay high salaries at the top (ie. baseball, hockey, basketball, football) are unionized.

I am going to frame this politically but bare with me, it’s mostly to make an epistemological point. This may seem like leftwing rubbish and it probably is, but I am overstating for simplicity.

Mathew Effect oblige, using productivity as a gamut to justify inequality has very specific structural outcomes. Using inequality as an incentive for acquiring power is a feedback loop. It concentrates power and wealth in the hands of the productive while simultaneously shaping the structure of the system so that the power to produce is generated from a very specific position. Inequality may or may not be a problem in itself, but in my view, dependence and disproportionate power is.

And there lies the difference between a Major League player and a CEO. A Major League player does not play in the Minor Leagues and so his status does not structure the Minor Leagues (except as an incentive). In the case of a baseball player disproportionate power does not matter that much. A CEO’s actions are not contained in a league and his game is not limited to a baseball field. A CEO has interests in all levels of production and all levels of society and politics. Ergo disproportionate power matters in this case.

That inequality encourages productivity may be an empirical claim but the idea that productivity should justify the inequality is not. Productivity is a conventional goal, but whether or not you agree with this goal, it is not neutral in that it is an axiological construct. I am not saying productivity is not a good goal (we all want to live in a plentiful economy), but as I have shown, the economists that are purporting that productivity justifies inequality are framing their rationality in a paradigm that is systematically reproducing the status quo and the growing inequalities present in the political process.

I know you probably won’t agree, but I hope I can at least convince you that your position is not politically neutral. So on that note, I will see you on the game field :)

Peer benchmarking seems to explain the drastic rise in ceo pay. There was an article about it recently in the FT, I think. Five seconds with google suggests there is an academic literature on it as well.

The mechanics seems to be: start with the assumption that your c-suite are all rock stars. To keep them you must therefore pay them at or above median of their peers. If everyone does this ... boom!

White rabbit: "Athlete performance is measured in a very direct way and there's no tradeoff between short term and long term performance."

I think that's an important point. It is a lot easier to measure an athlete's performance (to see their Value Marginal product, and compare it to other players). But just because something is hard to measure doesn't mean it doesn't exist.

Robert: to the extent that athlete's high pay is a result of their monopoly union power (I'm not sure it is, but *if* it is), that would be a reason to say their high pay is unjustified.

Nick Rowe: "Robert: to the extent that athlete's high pay is a result of their monopoly union power (I'm not sure it is, but *if* it is), that would be a reason to say their high pay is unjustified."

Don't the owners have a union? OC, they don't call it that, and their dues are country club dues. The belong to The Club, and in general, even though they compete amongst themselves, they take care of their own. CEO salaries are determined by other members of The Club. To some extent they are governed by cognitive dissonance, even if the performance of our CEO has been terrible, he must be good because we pay him so much. And if we pay him even more, that will prove that we are better than other firms.

Remember the Glass Ceiling? You may not grant that it exists, but if so, doesn't it have a simple explanation? Above the Glass Ceiling is where you start to collect rents, and become a member of The Club. Paying people more money is less important than letting them into The Club.

White Rabbit: It may be easy to evaluate the *relative* performance of atheletes, but it'a not clear how that translates into a marginal revenue product. That's the idea behind the tournament model.

If you are going to talk about athletics, you have to read Bill James. It may be only one dying quail a week, but the number of people who can hit that dying quail is small. And now that James is part of the establishment, you better hit for power and draw walks as well.

At the team level winning has a positive economic outcome. It may not be all that large, and it is conflated with a large number of other factors, but it definitely exists.

Nick: Players are workers. They are part of the , in french Marxian terms,( I don't know the english marxian vocabulary) the processus of production ( the technical aspect?) while the club owners are part of the social process.That, is players produce the game the way assembly line workers produce cars. they are more or less subject to being paid their marginal product value. CEO and club owners organise the political side. No assembly workers, no cars. No players, no game. No club owner? The game still exist.
They have no part in the production process, having long since delegated the managing task to underlings ( who thinks themselves as bosse even though they are only well-paid über-proletarians). Most CEOs are neither entrepreneurs not capitalists. Like kings who preside the victory parade though , unlike generals who planned the battles and the soldiers who fought it,have nothing to do with the results. Which is why they are so defensive. If they really had a case, it would be easy to make. " Ce que l'on conçoit clairement s'énonce aisément et les mots pour le dire viennent facilement" as we say in french. (" What is clearly conceived is easily expressed and the words come swiftly".

The tournament aspect is a minor detail.

From the recently promoted economic blog:

http://milescorak.wordpress.com/2011/11/11/inequality-and-occupy-wall-street-4-daddy-put-you-in-the-top-1/#comment-5

Jacques: "No club owner?" No club.

Where is the entrepreneur in that vision? I take a more Coasean perspective. Firms are islands of planning in a sea of markets. Only a very extreme free-market economist thinks that things just happen by themselves. Someone -- the entrepreneur -- forms a team (and not just sports teams) and makes things happen. Even the marxists found they needed planners.

Do firms without the expense of CEOs beat firms with CEOs in the market game? How do the latter survive in competition, if the CEO is just a useless expense?

Nick,

You're right, but the irony is the CEOs are the workers,and to the extent they're ripping anyone off, it's their shareholders (who, when you drill down through all the institutional investors, are the 99%). The marxists won, the workers control the means of production, and the capitalists (and their pension plans) are getting wiped out.

Jacques,

Sure, the game exists without the CEOs and the club owners, but without the CEOs and club owners to build stadiums (or con municipal governments into building them), organize leagues, figure out TV contracts, etc., it doesn't pay a hefty 7 figure salary. No players, no game, sure, but no CEOs and club owners, no 7-figure salaries for playing the game.

Min,

Actually you don't have to get all conspiracy theory to argue that club owners have a union. They have explicit unions - they're called the NBA, NHL, MLB, NFL, etc. If you want to be a big league hockey player you have to join the NHLPA. If you want to be a big league hockey team owner, you have to be a member of the NHL. Ditto for baseball, basketball and football.

Personally, when it comes to CEO compensation, I'm firmly in the camp that says its not a problem in itself, but it's a symptom of a problem with corporate governance. Share ownership of large companies are widely held, and boards of directors are succeptible to capture by corporate insiders. The directors don't have an incentive to play hardball with the CEO, and its hard for shareholders to challenge management's slate of directors. High CEO compensation doesn't really bother me, except in so far as it results from poor corporate governance.

"It may be easy to evaluate the *relative* performance of atheletes, but it'a not clear how that translates into a marginal revenue product."

Right. For a different example which has been much discussed lately, consider high speed trading. The profit from being slightly faster than the competition is unrelated to the benefit. The marginal product could be zero and there would still be incentive to spend money on it. If not regulated, eventually people will spend a fortune to place computers in the middle of the ocean (to be equidistant between two trading centers)...

Personally, when it comes to CEO compensation, I'm firmly in the camp that says its not a problem in itself, but it's a symptom of a problem with corporate governance. Share ownership of large companies are widely held, and boards of directors are succeptible to capture by corporate insiders. The directors don't have an incentive to play hardball with the CEO, and its hard for shareholders to challenge management's slate of directors. High CEO compensation doesn't really bother me, except in so far as it results from poor corporate governance.

This is pretty much where my thinking is these days.

Time to trot out my "hostage premium" theory of corporate pay. It is hard to tie the actions of individual corporate executives (or other employees) to the value of company output: particularly compared to small businesses. Corporations are large and more able manage risk than small businesses. So, they pay a "hostage premium" to encourage their employees (particularly their execs) to "police themselves" since they have that extra income to lose over what they could earn elsewhere. The "overpayment" is a hostage for good/productive behaviour.

Tying the pay of CEOs to performance should be a lot clearer than execs further down the corporate hierarchy. Yet, what we observe is pay rates that seem unconnected to performance. A (very high) premium which is apparently often not hostage to good/productive behaviour.

So, consider the mechanism which selects pays for CEOs. In political science terms they are like rigged election autocracies. What we get is an "insider's game": insiders agree that you should be rewarded for being an insider, a game they all hope to benefit from.

Do read the essay on this topic in "Baseball Between the Numbers". Calculation of a players salary is based on the player's ability to create marginal revenue for the team. Sometimes this is extra gate because you expect that player to get you a few extra home play off games. Sometimes for the merchandise sold...

Perhaps of interest:

http://blogs.law.harvard.edu/corpgov/2011/09/06/executive-pay-through-a-peer-benchmarking-lens/

and

http://www.cafr-sif.com/paper/14-Is%20Disclosure%20an%20Effective%20Cleansing%20Mechanism%20The%20Dynamics%20of%20Compensation%20Peer%20Benchmarking.pdf

Abstract:

It has become a regular practice for firms to benchmark their executive compensation against
peer companies. This paper examines the dynamics of the peer benchmarking process,
addressing whether the 2006 regulatory requirement of disclosing compensation peers, thereby
casting sunshine on the practice, has mitigated firms’ behavior of benchmarking CEO
compensation against a group of self-selected, highly-paid peer CEOs (Faulkender and Yang,
2010; Bizjak, Lemmon, and Nguyen, 2011). Our evidence shows the gaming of the
benchmarking process has actually been exacerbated since disclosure became mandatory in
2006, calling into question the ability of mere disclosure to remedy potential abuses in
determining executive compensation.

Patrick,

It doesn't surprise me that disclosure isn't all that effective as a means of regulating insider salary. The running gag among the lawyers who draft corporate disclosure documents is that (in theory - I stress the point, in practice they are uber diligent) they could say whatever they want, no one reads the damned stuff (except perhaps CEO's looking for examples of higher paid CEOs against which to benchmark their salaries - which would have the predictable, but unintended, result of driving up compensation). Personally, I've often fantasized about putting in a few pages of Qs, just to see what would happen. Moreover, for most shareholders, having the information is of no value (even if they could be bothered to read it), since they don't have a mechanism to act on it and for those large institutional shareholder who might have the ability to act on the information, let's face it, they could get it on their own.

Improving corporate governance is a sticky problem. All the current proposals seem to be treating symptoms rather than the disease. One idea I've had is to streamline the proxy process to make it easier/more of a default to allocate your voting rights to an 'activist investor' role. Perhaps that would require some minimum level of unhedged long-term exposure to the firm, and compensation based on the long term performance. I don't think you are going to get away from the problem of retail and institutional investors taking too much of a hands-off approach to corporate governance, so the solution is to create some sort watchdog of the watchdog. I know this essentially duplicates what the board is supposed to be doing, but I'm not sure you can ensure that the board is properly independent and not eventually captured by the management without shareholders that are paying attention.

Andrew,

I agree, the problem is obvious, the solution, not so much. The one possible structure that I've heard presented in the past, is the establishment of a licensed, professional, class of directors and director providers (in much the same way we have professional trust companies).

Provide a mandate that some minimum number/percentage of a public company's board of directors consist of professional directors, and that shareholders be provided with a choices (for each position) of directors from two or three different licensed "director" firms, with simplified procedures for shareholders to nominate licensed directors from other firms. You might also impose limits on the ability of management proxy holders to vote for these directors (so that management could only exercise proxies where the underlying shareholder indicated a vote for a particular director). You could also mandate higher compensation for "licensed" directors (to give them an incentive to get and keep positions, or indeed, to lobby for nomination as directors of particular companies). There would be an added cost there, of course, but the provision of professional directors would probably result in better oversight than, say, the usual collection of retired politicians or business folk who too often make up the outside directors (and who either lack the expertise or interest to be aggresive directors).

Moreover, it would change the incentives for outside directors. First, outside directors (and their firms) would have an incentive to aggresively protect shareholders interest because, if something blows up on (or shortly after) their watch, they look bad (damaging both their personal name and the reputation of their firm). Second, there's less of a downside for such a director to making a nuissance of him or herself with management. At present a troublesome director is likely to find himself not nominated for reappointment, and if he manages to gets nominated, there's a good chance that management will use their control of proxies to keep him or her out. Take away management control over nominating or re-electing those outside directors, and all of a sudden the directors have an incentive to be seen as being proactive for shareholders (so that they can get re-elected) and have less to fear from management. Moreover, by imposing a requirement that directors be appointed from competing firms, you might reduce the risk of capture by management (since the different "outside" directors would have every incentive to flag misdeed by their competitors).

It would take a awhile to build up a competent core of "professional" directors, you'd have to develop the securities and corporate law mechanics to make it work, and you'd have to develop ethical rules akin to those for lawyers regarding conflicts (in the case that director company A has directors of two competing companies), but I think it's an arrangement that could work. Not that I'm holding my breath.

"It may be easy to evaluate the *relative* performance of atheletes, but it's not clear how that translates into a marginal revenue product."

It is nice to be discussing something I know something about... this is complicated. Simply put a player's marginal value is strongly dependent on situation. Home playoff games played translate to huge amounts of increased team revenue. It takes about 90 to 95 wins to make the playoffs. The value of a good player on an 92-game winning team is huge. Paying big bucks for a star player with on a team that would normally win 88 games can bring in huge amounts of extra revenue when that team wind 92 and makes the playoffs. In terms of dollars, Matt Kemp (who was worth about 9 wins over a player just good enough to be in the major leagues last year) would have been worth huge amounts financially to an otherwise good team with one poor outfielder.

One then has to factor in merchandise: I want a Clayton Kershaw jersey. But when he wins a world series game for my Dodgers, I will ask my wife to buy me one for Christmas.

If the playoffs are expanded it will be interesting to see how this is diluted. Baseball is very different than hockey because few teams make the playoffs.

Nick: "No owners? No clubs!.
The entrepreneurial phase of major sports ended almost a centutry ago.
What is left is a legal monopoly to sell the sport plus a legal monopsony on buying the workforce, the last one aided, abetted and enabled by the players themselves. ( Sydney Crosby refusing $ 20M from a Swiss club in favor of $ 1M plus the chance of writing his name on a $ 20 tin cup ( yes, I know about he diminshihng MU of income but this is pushing it).
The owners pay for the right to income derived from these two legalized market distortions. It's akin to buying a medieval "office" from the Crown, like Grand Marmalade Spreader to His Beloved Majesty, Marmaduke the Beheader.
The only entrepreneurial aspect is in devising new way to con municipal councils, sports reporters and fans into paying your stadiums because of "economic spin-offs" and "putting your city on the map". A bit more morality and it would be as socially useful as pimping.

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