This Eugene Fama interview is a must-read if you think you've got the goods on EMH. Leaving aside our recent contretemps, however, I'll zero in on his comments on CEO pay:

Region: Another issue those papers touched on was compensation of CEOs, a controversial question in recent years. How do you view the suggestion that some CEOs are overcompensated?

Fama: If the [compensation] process gets captured by the CEO, then it can get corrupted. But if what you’re seeing is a market wage, then I don’t know why you would say it’s too high. If it’s a market wage, it’s a market wage. I don’t know of any solid evidence that the process was corrupted. So my premise would be that you’re just looking at market wages. They may be big numbers; that’s not saying they’re too high. It’s easy to say that people are paid too much, but when you’re on the other side of the fence trying to hire high-level corporate managers, it turns out not to be so easy.



The liberal rejoinder to this would be that even if it is true, this is a positional thing; if all CEO salaries were lower, you wouldn't have to pay so much to attract a good one. Of course, this doesn't mean that there is any good way to lower them; measures aimed at doing so, such as capping the amount of a CEO's salary that was tax deductible to the company, have mostly backfired, pushing compensation into things like stock options. And even if we could cap salaries, of course, that wouldn't mean that we should.

But what advocates of the idea that these salaries are necessary to attract good CEOs must contend with is the question of why CEO salaries have increased so much over time. Contrary to popular belief, CEO's are not driving inequality trends; there are too few of them, and they aren't paid that well. Nonetheless, they are much better paid than they used to be, and one wants to know why. Have the returns to having a good CEO gotten so much bigger? Is the supply of CEO's being outstripped by the demand? That latter case is pretty hard to make; there are actually slightly fewer public companies listed on the various exchanges than there used to be, and the population has grown rather rapidly.

I find Paul Krugman's argument that CEO's have simply gotten greedier, while the rest of us have become more greed-tolerant, less than compelling. Explanations I do find compelling:

1) Falling tax rates have increased the bang one gets from one's CEO salary buck

2) The size of public companies is bigger; CEO's are essentially taking a fixed piece of a larger pot

3) Being a CEO is riskier than it used to be; executives are more likely to be forced out

4) Stock options have disguised the true cost of compensation, boards spend them with the casual disregard of a tourist using a strange currency

5) Deregulation and globalization have made the economy more competitive, which means that CEOs matter more. Thus, it is more important to actually have a talented CEO, which results in a bidding war for a limited supply of human capital.

6) Advances in financial markets offer an alternative way to get really, really rich; CEO pay is bidding against Wall Street salaries for talent.

7) Deregulation means that boards are no longer afraid of attracting unfavorable government attention with lavish executive salaries.

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