31 January 2012

The Irrational Market in Executive Compensation

Question: The typical chief executive officer of a publicly traded corporation in the U.S. is paid more than his or her marginal contribution to the firm's value.

Strongly Agree: 0%
Agree: 32%
Uncertain: 32%
Disagree: 7%
Strongly Disagree: 0%
No Opinion: 10%
This is part of the latest poll taken by the Institute on Global Markets at Chicago Business School. The respondents are all big-wig economists - so this is "expert" judgement you are getting here. (As an aside, I think this project to gauge 'what economists think' about a range of policy matters is pretty useful.)

This suggests that a considerable number of economists are not persuaded that typical executive compensation schemes in the U.S. are well structured. CEO's seem to be overpaid, even by the narrow criterion of contributing to the profitability of their firm. How can the labor market work like that? And if the experts are correct, why should execs continue to get paid disproportionate amounts?



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