Wednesday, March 02, 2005

Walter Williams: are CEOs overpaid?

Here's a typically great piece by Dr. Williams, discussing CEO pay. One of his points illustrates the invisible bidding that bring supply and demand to equilibrium: "In order to keep him, the company must pay him enough so that he can't be lured elsewhere." Conversely, someone must "bid down" his desired wage if it's more than others are willing to pay.

I've come to believe that the worker is worthy of his hire, that is to say, the price the employer sets. After all, it is the consumer who determines the subjective value of a good, and employers are consumers of a good (the employees). Many people complain they "deserve to be paid more," but were that really true, they could find some company somewhere to offer them higher pay. It's no different than your refusal to buy something at the store because it's "too expensive": it's not worth the price, so you find a sufficiently close substitute that is worth the subjective value you place on it. Similarly, an employer obviously won't hire someone for $20 per hour when the work is only worth $15 per hour to them. So why do people still insist they're worth more? Discussing other factors like search costs will make this too lengthy, so let me recall another of Dr. Williams' articles, in which he described a conversation with his wife about unreasonable prices. He had a powerful, myth-breaking observation that "Only an unreasonable person would pay unreasonable prices."

By definition, then, a CEO paid millions annually in salary is worth that much, for the mere fact that the company valued the person enough to offer that. How about Bernie Ebbers? Dennis Kozlowski? Well, those cases are different, and I also don't want to say anything that might hold me legally liable. I have a feeling that if they're found not guilty (I didn't say innocent), they'll sue a lot of people. [Update: that is to say, they'll sue people who have been writing publicly about them as guilty.] The allegations aren't that they were overpaid, but that they engaged in unlawful practices.

A while back, Don Boudreaux elaborated further, explaining that a particular worker's wage is because of the margin. As I recall, the president of Morgan Stanley's Individual Investor Group received $2.4 million at the end of last year just in stock options. Meanwhile, it's been a couple of years since people in operations (where I've been working since the summer of 2003) received a pay raise. It's all about our marginal utility: with a bit of training, quite a few people could replace me. But there are very few people, let alone those of us in operations, who could run the whole division.


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