Q&O links my CEO pay post, noting:
As is the case in professional sports, more overall wealth and greater competition for that wealth produces a sort of salary/talent attenuation - the top-tier talents attract disproportionately more income, because the competition for that last little marginal edge in talent is so fierce. Michael Jordan wasn't 20 times better than a playing making $1.5m per year, but that marginal advantage he did have made him far more valuable than the rank and file NBA player.
But even the salaries of ordinary professional athletes have increased dramatically since the 1950's. Somehow, though, no one resorts to conspiracy theories about "captive owners", lax government regulation, or a grand cultural shift in the way we view those greedy bastards on the bball court. No, people are willing to pay a lot more to see professional sports than they used to, and so owners have more money with which to bit up the price of top talent.
Note that the lion's share of income inequality seems to be driven not by CEOs, but by compensation in the technology and financial services industry. Hedge fund managers may not, in some platonic sense, "deserve" what they get, but I guarantee you that none of the investors are giving them 2-and-20 because they're such good friends. Nor because they're brutal class warriors who throw largesse to financiers largely as a way to keep that cash out of the hands of the deserving poor.
It has gotten vastly more lucrative to be in certain kinds of professions, for reasons we don't entirely understand. But if your story involves a sudden increase in Net National Greed, I'm pretty skeptical.
In my industry, salaries have increased by more than 100% in the 5 years. The part I can't understand, one would think that increasing salaries by 100% would increase the supply of qualified candidates. But it doesn't seem to be working. If anything the supply has been declining.
One would think that offering high paying, flexible, secure, interesting work, applicants would be lining up around the block. But, it doesn't seem to be happening.
Hmmm. But the real reason why salaries are so much higher than the 50s was that back in the 50s the owners conspired to prevent players from competing for higher salaries. Also, the increase in the size of the fan base, the increase in the wealth of the fan base, cable TV, yada yada yada, vastly increased the profitability of professional sports.
By and large, CEOs and would-be CEOs are not competing in anything resembling an open market. They are peers rewarding each other with other people's money. When the head of the New York Stock Exchange (you know, that bald-headed guy) got a 2000% raise, from $1 million a year to more than $20 million a year, it wasn't because his boss was afraid he would leave if he didn't get the raise, and it wasn't because they felt they couldn't get an adequate replacement for less than $20 mil. It was because his pals decided he was a right guy, an in the Big Apple you can't live like a right guy unless your salary is north of $20 mil.
Of course people "resort" to the theory of an increase in greed to explain why ball players make vastly more than they used to. People have been making that argument since ballplayers' salaries started to take off in the 1970s. And, if ballplayers were inhibited by a sense of shame from asking to make 1,000 times as much as the ballboy or a minor leaguer rather than merely 100 times as much, perhaps there would be more money sloshing around in the system to accommodate the wage demands of more easily "replaceable" personnel, like ballboys and minor leaguers. And then maybe someone besides the top 1% of the country would have benefited significantly from economic growth over the past 6 years.
Alan already hit on it, but it's a seriously flawed argument to say athletes are making more simply because we're paying more. Television broadcast rights and the formulation of player unions have more than anything else to do with the rise in the salaries of professional athletes.
I thought salaries were going up because the Fed is debasing our currency. Or am I in the wrong thread?
Brooksfoe - If someone generates 1000x as much revenue as someone else why should they be ashamed to make 1000x as much?
Ball players are union labor and they are extracting the true value of their work from the team owners - why would you object to that?
why would you object to that?
Because they're being paid based on their ability (or at least their ability to generate revenue) and not by seniority?
The Michael Jordan analogy would make more sense if it were the other players determining what to pay Jordan, knowing that a higher salary for Jordan would lead to higher salaries for themselves.
There is a "market" for CEOs to about the same extent that students are "customers" of academic institutions. There is obviously some truth to both statements, yet they also elide many critical points.
The CEO "market" is thin and sporadic, information is often opaque, buyers (i.e., the decision-makers) have enormous self-interest that is not necessarily correlated with the interest of the institutional buyer (the firm) etc.
Comparing a hedge fund manager (or any trader) to a CEO is inapt. The trader can very automomously select a trading strategy and follow it; his/her return is very much a function of his/her choices, albeit these are affected by other factors. To continue the sports analogy, it's like a batting average. And the investors get to make informed investment decisions.
The CEO is far less autonomous except when it comes to buying and selling pieces of the company. In terms of actual operations the CEO is more circumscribed and the results much more contingent on many other factors.
Which is not to deny that they can't make a big difference. But too much CEO compensation is based on the business analog to the Great Man approach to history. Too many CEOs today are being paid as if they were Napoleon, when they're really just Louis Napoleon.
Maybe, but I wonder how much effect the incestuous relationships (or backscratching, logrolling, whatever term you want to use) amongst Board members has to do with it.
They Rule
liberalrob, that sort of collaboration between board members in order to combine their influence to extract higher salaries from their employers sounds suspiciously like . . . collective bargaining.
Except when it's for really rich people, it's OK, apparently. Because they're negotiating for a share of wealth they actually create, and not just trying to get perks based on seniority and leverage.
Except for those lifetime pensions and golden parachutes, of coiurse.
If you buy this story, I don't see where it's so hard to believe the great man theory as applied to CEOs.
Professional athletics isn't the most effective analogy to use. All you need to do is look at the New York Knicks, and you can see that salaries are high because the people who pay them have no idea what they are doing. I believe that this is also true of many corporate boards. While it is true that they pay higher salaries now because they can, it is also true that they pay higher salaries out of ignorance. The New York Knicks could win as many games, and sell as many tickets (and paraphernalia) with one tenth the payroll. This is not just hindsight. Every sports commentator who examined the moves the Knicks made over the last few years vociferously expounded on the stupidity, the expense, the counterproductiveness, of everything they were doing. I think if "corporation watching" were as popular as basketball, people would be saying the same things about the boards of many companies. CEO pay is as high as it is because the people who higher CEOs and set their salaries are bad at what they do.
Say, couldn't you apply the efficient markets hypothesis to CEOs?
Given that prosepective employers all have equal access to information about CEOs, is there any reason to believe that paying for an expensive CEO will give you a better proportionate return on your money than paying less money for a less expensive CEO?
Once you've paid $100 million for a CEO, you've outbid everyone else for him. So you've paid the CEO any additional value he might have had to offer your company -- because if there was more value to be had, some other company would pay him more for it, wouldn't they?
Oh, economists. It's nice when they pretend society doesn't exist, not even a little bit and certainly can't change at all, oh no sir. Because don't you see, the laws of economics are eternal and entirely outside human values!
I say this because of course "greed" can increase. Capitalism, for example, was the invention of greed. Greed wasn't really OK in the Middle Ages. Now it is.
And of course you can compare the social stigmas attached to greed across time. Puritan New England was both highly capitalist and fairly egalitarian, anti-ostentation and so on. As a result, wealth was created and then either redistributed or hidden. In the 80's, we get Gordon Gekko. Those are different, but supply and demand functioned in both.
This isn't to say that we shouldn't have economics, of course. (I'm here reading this blog!) Economics is really good at explaining things like the contemporary grain market, where I don't think that society is really functioning along lines much different than undergraduate econ. Econ is really bad at explaining why people get married (raise your hand if you think Becker is the most convincing explation out there. Be honest). Most things are somewhere in between.
I recommend Mark Granovetter's article on "The Problem of Embeddedness" for more.
I'd love to hear Megan write about whether she thinks that greed can increase (or be allowed to flourish more fully) across time and if so, why she doesn't believe that it has over the last 50 years.
"Greed" is just a subjective term describing the self-interest of others when it is at odds with the self-interest of the person using the word "greed."
For individuals, then, "greed" can appear to increase and decrease because their self-interest can be more or less aligned with the self-interest of others.
Objectively, though, there is always the same amount of self-interest -- that is, all the self-interest in the world. That self-interest doesn't become "greed" until it's viewed subjectively, from a self-interested perspective.
Subjectively, all the self-interest that is aligned against your self-interest becomes "greed," and can increase or decrease depending on the alignment of your own self-interest.
"But if your story involves a sudden increase in Net National Greed, I'm pretty skeptical."
Wonderful sentence. Arthur Bentley's groundbreaking book "The Process of Government" began by complaining about people whose explanations for everything turned on sudden and inexplicable changes in people's characters. Bentley almost singlehandedly founded the subject of political science, but his starting point is widely ignored.
The actual greed in society might not change all that much, but the extent to which people act on it might. I once read a book from the 1950s that discussed how bosses didn't want to be seen paying themselves too many times more than they paid their workers. All of them lived in the same towns, after all, and there were both public relations problems and problems of local influence if a boss displayed too much overt greed. High standing in the community came from paying workers well and not being excessively grabby oneself.
It still does in some places, but a lot less so than in the past. Perhaps because the "communtity" is the audience for national media, not a single geographic community where the workers in Business A are the customers for businesses B, C, and D.
It has gotten vastly more lucrative to be in certain kinds of professions, for reasons we don't entirely understand.
Maybe this is way too simplistic, and it's not to say that other factors aren't involved as well, but how much of this is because we're just a more populous country than in the 1950s? Where the entire country wants to patronize the best person in a given field -- and where that person's work is scalable -- the growth of population makes it likely that that person will earn relatively more money than people in other professions. For example, the best basketball player in a nation with 300 million people will make more money than the best basketball player in a nation with 150 million people. That isn't true of janitors or mechanics; population growth doesn't enable them to sell their work to more people. (Add to this the fact that we're a richer country than in the 1950s, making it more likely that the wages of the best basketball player or hedge fund manager will be bid up.)
the true value of their work - Jmo
The idea that there is such a thing as a "true value" of work is a Communist idea.
Don't forget two other things that have changed in pro sports funding since the 50s, apart from ticket prices (and in addition to Mr. Buck's excellent point).
On-field/mid-game-TV advertising (and TV broadcast deals in general), and merchandising.
I'm not sure what the percentages are for each sport, but the amount of income from team-branded stuff has to be huge. My impression is that it might well be more profitable than selling tickets, but I haven't looked it up.
(And I'd like to echo brooksfoe by emphasizing that the idea of "true value" of labor is literally Communist, not Communist-as-term-of-abuse.)
Brooksfoe - But as for my other question:
"If someone generates 1000x as much revenue as someone else why should they be ashamed to make 1000x as much?"
I know that Norwegian culture prides itself on it's equality and they find it deeply repulsive if someone overtly demonstrates their superiority. I guess you would argue that even if you generate 1000x as much revenue, one should be magnanimous and share the wealth.
Jmo, what do you mean by "generate revenue", apart from "get paid", which makes your statement a tautology? How do you know how much of a corporation's revenue is generated by any given person?
I guess you would argue that even if you generate 1000x as much revenue, one should be magnanimous and share the wealth.
And you would argue that one should not be magnanimous and share the wealth? What's your justification?
Generally, the principal/agent issues in pro athlete compensation are not nearly as large as they are in CEO compensation. When George Steinbrenner decides to blow 21 milion on an aging guy who makes a handful of starts between injuries, hey, it's his cash, so who cares, if Steinbrenner doesn't? On the other hand when compensation boards award large compensation to executives, often under-performing executives, the money comes from people who frequently have as their only recourse the sale of their stock. This is not a very efficient market, but I'll be damned if I can can come up with a solution that doesn't create more, and quite possibly worse, problems. Generally speaking, I guess I'd favor something which made management more easily accountable to stockholders.
If by "true value of labor" you mean the labor theory of value, that predates Marx.
I realized about 1/2 hour ago that I read this blog probably more for the comments than for the posts, whereas I read Fallows' blog for Fallows. Does this make our hostess the blogging world's Pamela Harriman? Not bad work if you can get it.
I'd like to see a graph displaying the average salaries of professional athletes and the average public investment in stadiums and arenas over the last 50 years.
As far as CEO pay:
1. Everybody is pretty sure that the CEO makes a difference.
2. Everybody is pretty sure that some CEOs make a big difference.
3. Nobody can tell how much of a difference any individual potential CEO might make.
4. Nobody believes there's such a thing as "too much CEO compensation".
So, what happens if you don't offer the candidate that can make a difference enough money? You don't get him -- that's bad.
What happens if you offer the candidate that won't make a difference too much money? Nothing -- you're probably no worse off than you were before, except that you're short some money.
What happens if you offer the candidate that will destroy the company from incompetence or greed too much money? Bad things, obviously, but the amount of money by itself probably isn't what causes them.
So, there's a downside on not enough money and no downside on too much money. Result: too much money.
Brookfoe:
I'm a consultant, so I work with guys just out of college billing out at $50/hr and I worked with senior consultants billing out at $1500 an hour. Now, we can determine, down to the penny, the revenue generated by each person.
Is it wrong for the senior consultant to be paid 30x as much as the new hire?
In business some people just add a lot more the bottom line than others and need to be compensated accordingly.
Note that the lion's share of income inequality seems to be driven not by CEOs, but by compensation in the technology and financial services industry.
You have any support for this?
Hedge fund managers may not, in some platonic sense, "deserve" what they get, but I guarantee you that none of the investors are giving them 2-and-20 because they're such good friends.
I would disagree with this from my experience - a huge amount of interactions/purchases happen because of personal networks. This is also true of hedge funds. I have seen a bunch of cases of funds that consistently underperform their benchmark, yet the relationship persists. And while I think that investor naive has something to do with it, I think internal networks have an affect as well - has this ever been studied?
When we look at a no-bid contract going to Haliburton when the VP is the former CEO - how do we analyze this from an economic point-of-view? I'm not arguing that they could not have gotten the contract for their performance - or making the standard liberal argument that they don't deserve it - I'm asking how EMH accounts for areas where other factors clearly make the market inefficient.
I bring this up because it strikes me the same way with CEOs. Comments welcome - I don't claim to be an economic scholar here.
A son:
I'm a consultant, so I work with guys just out of college billing out at $50/hr and I worked with senior consultants billing out at $1500 an hour. Now, we can determine, down to the penny, the revenue generated by each person.
You're talking about the consulting firm's revenue, not the client's, correct? You're saying you pay consultants according to what you charge the clients for their services, which is a perfectly sensible arrangement for you.
Is it wrong for the senior consultant to be paid 30x as much as the new hire?
Is the client getting 30x more value from the senior consultant than from the new hire? If not, is that wrong? You tell me.
In business some people just add a lot more the bottom line than others and need to be compensated accordingly.
In business, some people get a piece of everything no matter whether they contributed anything meaningful or not, and you'd better keep your mouth shut about it or your turn will never come.
"I say this because of course "greed" can increase. Capitalism, for example, was the invention of greed. Greed wasn't really OK in the Middle Ages. Now it is."
This sentence doesn't make any sense. Capitalism invented greed? That seems a bit at odd with that next sentence there, unless you argue that greed was a mainly theoretical attribute.
Of course, it wasn't. Capitalism did not invent greed. It was a sin far before even mercantilism was the dominant system, and that means there were people out there doing it, which meant a LOT of people thought it was OK.
Even if people were more hostile towards 'greed', one must remember that greed is an expression of self interest. Feudal lords did not need to be moneygrubbing merchants to gain wealth, who needs that when you have serf labor and arranged privileges with your king? Their self-interest was largely fulfilled by entrenched societal organization. That's why the 'capitalist/greedy/bourgeoisie/middle' class initially arose not from the feudal lords, but from those who lived in towns and thus could not take advantage of that structure.
Is the client getting 30x more value from the senior consultant than from the new hire? If not, is that wrong? You tell me.
In situations like that, the more senior consultant typically has knowledge and experienced that are extremely rarified relative to the field overall. The 30x discrepancy is often a number merely for the sake of a number, because the senior consultant's services are never infinitely valuable but they do tend to be many times more valuable than a new entrant in the field.
This doubtless applies to many CEOs as well, although obviously not all of them.
Try this:
We consider how much of the top end of the income distribution can be attributed to four sectors -- top executives of non-financial firms (Main Street); financial service sector employees from investment banks, hedge funds, private equity funds, and mutual funds (Wall Street); corporate lawyers; and professional athletes and celebrities. Non-financial public company CEOs and top executives do not represent more than 6.5% of any of the top AGI brackets (the top 0.1%, 0.01%, 0.001%, and 0.0001%). Individuals in the Wall Street category comprise at least as high a percentage of the top AGI brackets as non-financial executives of public companies. While the representation of top executives in the top AGI brackets has increased from 1994 to 2004, the representation of Wall Street has likely increased even more. While the groups we study represent a substantial portion of the top income groups, they miss a large number of high-earning individuals. We conclude by considering how our results inform different explanations for the increased skewness at the top end of the distribution. We argue the evidence is most consistent with theories of superstars, skill biased technological change, greater scale and their interaction.
anony-mouse, re: pay at consulting firms:
In situations like that, the more senior consultant typically has knowledge and experienced that are extremely rarified relative to the field overall. The 30x discrepancy is often a number merely for the sake of a number, because the senior consultant's services are never infinitely valuable but they do tend to be many times more valuable than a new entrant in the field.
Again, is that value to the consulting firm or value to the client? I'll bet in many cases the senior consultant already has a personal relationship with senior management at the client company, and the value of this is real and indisputable to the consulting firm. But the value to the client company itself is harder to prove.
Subject matter expertise? I'm sure sometimes that the senior people have more of it and it makes a difference, but I'll bet bringing in the business of your squash partner raises your compensation no matter what work gets done.
Again, is that value to the consulting firm or value to the client? I'll bet in many cases the senior consultant already has a personal relationship with senior management at the client company, and the value of this is real and indisputable to the consulting firm. But the value to the client company itself is harder to prove.
Uhm, those kinds of relationships are pretty much the basis of effective consulting (although they also play heavily in some kinds of supplier relationships, also). Cold-calling doesn't work in consulting businesses and advertising has low rates of return; while good networking produces revenue in spades. Companies generally prefer to work with known entities unless they get burned, in which case they'll go elsewhere, but even then word-of-mouth will prevail over phone-book lottery.
But that doesn't get you $1500 per billable hour unless the value of your expertise and ability is proven. It's possible someone who feels rich enough already could rest on their laurels and only agree to work when some sort of back-scratching relationship produces another contract. In my experience, however, consultants who merit those kinds of wages are usually quite busy.
Objectively, though, there is always the same amount of self-interest -- that is, all the self-interest in the world. That self-interest doesn't become "greed" until it's viewed subjectively, from a self-interested perspective.
Huh?
"Self-interest" is just a subjective term as "greed," you know. There is no such thing as "objective" self-interest. I can define my own "self-interest" any way I want, from accumulating billions of dollars in wealth to giving everything I have to a homeless guy to slaughtering infants for my personal pleasure. It's totally subjective.
I do like your statement that there is always the "same amount" of self-interest in the world, though. By the way, what's the unit of measurement for self-interest? I propose the Galtometer (GAHL-TAH-MEH-TER), in honor of John Galt.
Uhm, those kinds of relationships are pretty much the basis of effective consulting (although they also play heavily in some kinds of supplier relationships, also). Cold-calling doesn't work in consulting businesses and advertising has low rates of return; while good networking produces revenue in spades.
But anony-mouse, while all of these are activities which ensure that a particular consulting firm gets the business, none of them actually result in a net gain in production for the economy. Some consultancy firm would have been doing that work; it's just that if you didn't have the relationships, it might have been someone else's firm, not yours. And if firms decide to allocate a larger share of their revenue to the "rainmakers" who make the connections, rather than to the drudges who perform the work, that's a dynamic that will produce a perfect Krugman scenario of rising inequality: no overall growth in productivity, but more money for the top 1% and less for the bottom 99%.
This is exactly why I would like the commenters above to disentangle what they mean when they say an individual "generates revenue". If you put a dumb, lazy ex-frat boy on the payroll who does nothing but chat on the phone and play golf all day, but brings in heaps of contracts from all his rich frat buddies, would you say he's "generating revenue"? Obviously some people do more valuable work than others. But does anyone really do work that is 1000 times as valuable as anyone else?
I confront this issue every day with Vietnamese employees whom I pay much less than I pay myself, though they work as hard or harder. I certainly have skills they don't have. And on some jobs, where I do most of the work, I could pay them 1/20th or less of what I pay myself, and they'd still do the work. But I don't, because they know what the contract pays. I pay them 1/10th, and then there are some expenses which I carry. If I paid less, they would see me as looking down on them for no good reason. This is a social, ethical restraint on income disparity, but those kinds of restraints disappear when 1. people don't know how much their coworkers earn, which is too often the case in the US, 2. people in an organization are far removed from each other, often in a hierarchical fashion, and don't interact with each other as equals, or 3. there is a competing ethic which proclaims that income differentials are just and right and in the public interest, and must reflect in some sense the "true value" of an individual's work (cf. above), which is a cultural factor in the US that has grown stronger over the past 30 years.
m.jed - thanks for the info. Some comments:
"Non-financial public company CEOs and top executives do not represent more than 6.5% of any of the top AGI brackets (the top 0.1%, 0.01%, 0.001%, and 0.0001%). Individuals in the Wall Street category comprise at least as high a percentage of the top AGI brackets as non-financial executives of public companies. While the representation of top executives in the top AGI brackets has increased from 1994 to 2004, the representation of Wall Street has likely increased even more."
The key phrases in that quote:
- "At least as high a percentage of the top AGI brackets as non-financial executives."
- "the representation of Wall Street has likely increased even more."
I'm not saying you don't have a point - but this isn't data. 6.5% is 6.5% - so that would argue that the two are equal, although perhaps there is more acceleration in the income of Wall Street.
"has likely increased even more" - so that's not data - that's a guess.
Also - your link didn't work - please repost whenever you have a second - I'd love to take a look at the full report.
Ms. McArdle's thesis notwithstanding, we do know how to explain why it's become vastly more lucrative to be at the top in certain professions. As she is probably aware, in economics this notion is known as the "Winner-Take-All" theory. Robert Frank and Philip Cook speak concisely on this topic in "The Winner-Take-All Society."
http://www.amazon.com/Winner-Take-All-Society-Much-More-Than/dp/0140259953
I can attest that as a former freelance classical musician, my talent was only marginally inferior to the talents of those few musicians who, through perseverance and luck, were able to enjoy the benefits of full employment, whether through a symphony orchestra appointment or a solo career.
A case in point: Renee Fleming is a world-class soprano. She commands high appearance fees, she sells more records than any other soprano and she has headlined at the Metropolitan Opera more times than one can count. Yet, during my playing career I was fortunate enough to work with numerous other sopranos who have almost the same talent as her, but will remain in an inexorable abyss of obscurity.
Ms. Fleming, through an infinitesimally higher talent level than other world-class sopranos, has captured a disproportionate percentage of record sales, sold-out solo concerts and Met appearances. To argue whether she is "deserving" of this market share is moot. The "Winner-Take-All" theory posits that whether one is deserving isn't in question. What is in question is how much people are willing to pay for the tiny difference in talent Ms. Fleming offers.
The answer, in a phrase, is a lot. People--especially donors to non-profit arts organizations--demand that someone of Ms. Fleming's talent is hired to headline their next concert performance. And donors are willing to pay top dollar for her talent, however marginally indistinguishable it is to the next talented soprano out there. That tiny marginal difference yields an exponentially higher marginal reward.
Greed is not the culprit. Our preferences are refined enough to know (or at least convince us that we think we know) the difference between the very great and the sublime. To be sure, some of the great sopranos that I've worked with performed with exquisite utility. Ms. Fleming takes her craft to another level. And even though that level is only a little bit better than the next best soprano, that little bit transforms others' utility into her great art.
Brooksfoe:
I'm a consultant as well can I can give you one example of someone doing 1000x as much work as someone else. I work with someone who created a software application that firms can use to automate their billing. Instead of printing and mailing invoices clients and vendors can move invoices electronically.
Now, this product that this person created can save companies 100's of thousands of dollars a year in mailing costs, personel costs, and a decreas in accounts receivable days. His product is doing the work of literally thousands of people. So, I would say that as the millionaire owner of a software company he is literally 1000x of times as productive as a billing clerk making 1/1000 as much.
And yes, he wrote the application all by himself.
while all of these are activities which ensure that a particular consulting firm gets the business, none of them actually result in a net gain in production for the economy.
True, but also typical. In most businesses, no single person wears all the hats, and each person's contribution to a project is of limited or no value in isolation. But some people, for any number of reasons, are also not as easily replaced as others; without their contribution, the project simply doesn't get done or the contract isn't awarded to that company.
That can have an enormous amount of intangible value, which was the thrust of my earlier comment. Can you say that one person is worth exactly 30x more (or whatever) based on the billing rate? Probably not. Can you say that the projects would not be feasible and/or obtainable without that person's specialized contributions? If yes, then that person's value may well be disproportionately greater, because without it, nobody gets to produce anything. In that case, the "30x" is meaningless as a precise value, and merely a case of idle hands becoming the devil's abacus.
Some consultancy firm would have been doing that work; it's just that if you didn't have the relationships, it might have been someone else's firm, not yours. And if firms decide to allocate a larger share of their revenue to the "rainmakers" who make the connections, rather than to the drudges who perform the work,
What would these "drudges" do without any work to perform? Those who have the resources to produce new contracts are not only valuable to the company where they work, they are valuable to other companies would like more work, and their services will be bid up accordingly.
that's a dynamic that will produce a perfect Krugman scenario of rising inequality: no overall growth in productivity, but more money for the top 1% and less for the bottom 99%.
That's an overly simplistic way of analyzing such a situation, IMO. A better analogy would be a banker: the "rainmaker" is providing the service of matching a surplus in services and labor with a those who have a deficit. For high-paid consulting work, this usually means a somewhat specialized service for specialized circumstances. Instead of one consulting firm providing the service on behalf of many seekers (and maintaining a database of available independents who could be called in based on project relevancy), the party seeking such service would otherwise have to hire more employees for work that would not be available full-time (and in which they would have less time to specialize), or else expend resources searching for an available independent, either of which is less efficient and would lead to lessened productivity and lower wages for all.
I can easily imagine that Krugman's politics might prefer the latter scenario, since it would mean that the now-less-specialized employees would be meriting a more populist pay scale and some of the difference would be going to additional staff members in HR, but it wouldn't be good economics.
dmwr
try this:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=931280#PaperDownload
if that doesn't work, google scholar (or SSRN) "Steven Kaplan" "wall street" "main street"
And yes, the relevant abstract doesn't provide data beyond the 6.5% figure for CEOs - except if CEO's make up less than 7% at any income cohort threshold, then unless they have massively skewed pay packages compared to other highly paid individuals it's unlikely that they'd be causing income inequality. I've seen articles that the top 10 hedge fund managers were paid (paid - not worth) each around $1 billion last year. We know with a good deal of certainty that very few if any CEOs of a publicly traded firm was paid anywhere near that unless it was an early vesting of previously granted deferred compensation (I'm thinking Bill McGuire of UnitedHealthcare came close, but had to pay much of it back anyway).
I think highly paid CEOs are in the $25-$50MM range and I'd guess that would be an extremely small percentage of all CEOs.
As someone has already pointed out, it is a pretty terrible idea to use professional sports salaries from the 1950s as your benchmark. That was during a period of cross-team market collusion, which only ended with the adoption of free agency in later decades.
jmo, your guy's product would only be doing the work of "thousands of people" in a world in which people were actually still doing their accounting with pen and paper in ledger books and every firm needed an on-staff accountant to do the bookkeeping. If people's jobs are obsolete, they move on to other jobs that aren't obsolete, and then there isn't anyone to do 1000 times as much work as them. A situation where there is consistently someone who is making 1000 times as much as someone else should only be seen if there is some kind of hard barrier which prevents the person whose work has been made obsolete from finding more productive work -- something like the gap between you and an illiterate subsistence farmer in Niger.
A better analogy would be a banker: the "rainmaker" is providing the service of matching a surplus in services and labor with a those who have a deficit.
anony-mouse, you're right that the matching of a need to a provider is in itself a productive good. At root, I just question whether it's the kind of good that should be used to justify income gaps of 2 times between better- and worse-connected employees. Let alone 10 or 100 times.
Brooksfoe - I'd be interested to hear what you think of inventors? If, for example, you invent Brooksfoe - I'd be interested to hear what you think of inventors? If, for example, you invented a technology to increase automobile fuel efficency by 2%, or electricity transmission by 2%. These technologies could worth 10s of billions of dollars. What % of those 10s of billions would the inventor be entitled to?
"At root, I just question whether it's the kind of good that should be used to justify income gaps of 2 times between better- and worse-connected employees."
In my business, there are many people who are technically skilled, but - in many cases - they have NO socials skills. In the marketplace there are many people who have great social skills, but are technically inept. It is very rare that one finds someone who is technically skilled and socially adept. The rarity of these skills drives up salary gap between salesmen and programmers.
I'm sure you could understand how a socially adept, technically skilled, salesman who's been in the business for 20 years (been to the trade shows, seminars, etc.) someone who's had the chance to build a huge client list makes 50x as much as the socially inept programmer who just graduated from college.
m.jed - thanks for the link. Here's a thought about hedge funds: they are an extremely inefficient market - 8000 of them with huge information asymmetry - so maybe the reason that the guys at the top get so much higher incomes than the rest.
Not a single argument here explains why European and Japanese CEO compensation is so much lower than US CEO compensation
Jmo's and anony-mouse's comments match my experience: Some people are just better at certain tasks.
I work in a software company with a fairly flat hierarchy that is willing to let people expand their skills. I tried my hand at Project Management and failed miserably. I'm a really, really good system designer, though. Who should get paid more: The project manager who makes projects look easy or the system designer that makes them work well and last or the developers who write the code?
It depends entirely on who is the least replaceable. What's the more difficult skill to find when hiring new people? Obviously not a run-of-the-mill software developer; they are still a dime a dozen since the tech boom. The project manager? Perhaps. Managing detailed technical projects is hard and every one is different. On the other hand, it's not like building a sky-scraper. The software designer? I think so both because I am one and I'm greedy but also because I've found it to be a very rare skill-set. Over my career I've known hundreds of developers but only dozens who can design things well.
Software development will in the not-so-distant future be mostly automated; the trends are in place and accelerating. Software design? Maybe. For simple things like billing systems that can be clearly described by business folk, almost certainly. In my line of work where the speed of light and microseconds count, probably not in my working lifetime.
If it is, however, I'll take my demotion in stride. I have done nothing to "deserve" my salary - it is simply a talent I happen to have; much like any other talent, say being able to play baseball well. I see no reason to give away something others see as valuable, though. Why?
If you bought a house (from an estate with no heirs) and found a crate of valuable paintings in the garage, would you give them away or sell them?
If you bought a house (from an estate with no heirs) and found a crate of valuable paintings in the garage, would you give them away or sell them?
mrsizer, you forget that under the Efficient Markets Hypothesis, this never happens.
No one is contesting the point that people whose talents or efforts are differentially valuable should be paid different amounts. What is being contested are two things: first, is it a problem for a society in which people are supposed to be fundamentally equal when the market, as currently constructed, values one of them 1000 times as much as another? Second, given that immense CEO compensation seems to be unrelated to performance, is there anything rational or productive behind these valuations, or do they reflect something else? You may be paid less than the project manager at your firm, but I seriously doubt that you are paid 10 times less.
brooksfoe - "You may be paid less than the project manager at your firm, but I seriously doubt that you are paid 10 times less."
In my company kids fresh out of college start at about 45k. Project managers with 15+ years of experience can make upwards of 450k.
"is it a problem for a society in which people are supposed to be fundamentally equal when the market, as currently constructed, values one of them 1000 times as much as another?"
They should be equal before the law, but they are certainly not equal when it comes to intelligence, work ethic, social skills, entrepreneurial skills etc.
It seems that you think what an employee brings to the table is additive. If you have an employee with an Intelligence of 10 but no Work Ethic (say we give him a 1), what is the value of that employee? You might say 11 (10+1). I would say they are a 10 (10x1). Now, how would you rate an employee that has an Intelligence of 10 and a Work Ethic of 10. You might argue that they should be rated a 20 (10+10). I would say they should be rated 100 (10x10).
So, at least to me, it makes perfect sense to see a person who is really intelligent(10) but has no work ethic(1), no social skills(1), and no entrepreneurial skills(1) makeing 60k . Just as it makes perfect sense to see a person who is very intelligent(10), very industrious(10), superlative social skills(10), and phenomenal entrepreneurial skills(10) making 60 million or even 600 million.