Alan Reynolds
It is just too easy to describe somebody else as terribly overpaid, particularly when he or she is the boss. As if anyone would be surprised or enlightened, Wall Street Journal columnist Jesse Eisinger decided to inform us that, "To me, it's irrefragable that CEOs are overpaid." All of them? Really?

Bad CEOs must be overpaid, by definition, because they should be fired. And many are. It is an increasingly risky job, thanks to the Sarbanes-Oxley law, and risk is rewarded. Yet it becomes clear that some outstanding CEOs have been underpaid when they are recruited by better offers from other firms, sometimes in other countries.

A great CEO can do miracles, often turning around a stagnant or failing firm. I bought stock in Apple for about $15 a share. Whatever they paid Steve Jobs is fine with me. If you don't own stock in a company, then what they pay anyone isn't any of your business.

If it means anything at all to claim all CEOs are overpaid, it must mean the person making such a claim believes the best CEOs would still eagerly tackle the toughest chores even if they were paid much less. That is what economists mean by the word "rent."

In a chapter I wrote about executive compensation in William Niskanen's fine book, "After Enron," I found no evidence that rent is common in the market for executive talent. There were unplanned windfalls from stock options in the late '90s, but that was simply because nobody could possibly guess how high tech stocks would fly in the early '90s when those options were handed out.

Eisinger thinks: "The key question is this: Are executives being paid what the market will bear, or is the market broken? The answer lies in whether rich compensation leads to good performance." But that, in turn, depends entirely on how you define both compensation and performance.

The Wall Street Journal article relies on Harvard law professor Lucian Bebchuk -- "a critic of the disconnect between pay and performance" -- and Yaniv Grinstein of Cornell: "In the period from 2001 to 2003, top-executive compensation (for the top five executives) amounted to 9.8 percent of the companies' net income, almost double the 5 percent in 1993 to 1995." That might be interesting if stockholders measured performance by FASB earnings rather than by stock prices and dividends.


Alan Reynolds

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