Saturday, July 01, 2006

About Corporate Executive Pay

Recently, Göran Hägglund, the leader of the Swedish Christian Democrats attacked Swedish CEO's for receiving excessive pay. Most likely this was a case of political pandering to culturally conservative but economically leftist Social Democratic voters who like the Christian Democrat's negative attitudes towards homosexuals and their more tolerant view of mothers who want to take care of their own children but who dislike their marginally more free market views of economics. By indulging in anti-CEO rhetoric, Hägglund clearly hopes to attract some of these voters.

But apart from its vote-winning appeal, do his attacks make any sense? Quick answer: no.

Having a good CEO and rewarding him (or her) if he does well is absolutely vital. The cost of the wrong strategic decisions usually cost companies far more than the even the highest CEO salary. The marginal benefit of having a good CEO is so much greater than the marginal benefit of any single regular worker, so it makes sense to pay them far more.

It would be wrong to award good CEO's with the entire marginal benefit (or even most of it) of their good decisions, since it is not them but the capitalists who take the risk of losing money if things go wrong. But giving CEO:s whose decisions have created billions in benefits for the companies a few millions is hardly unreasonable.

To be sure, there are probably a lot of CEO's who are overpaid. Indeed some probably shouldn't even be CEO's. But there are likely also some CEO's who are underpaid. Just how Hägglund or anyone else can say that CEO pay is generally too high is not clear. Is he basing this on some egalitarian dislike of income differentials? Probably, but in that case there is no reason why he should single out just CEO's. A lot of writers, movie stars, athletes etc. earn more than CEO's and yet they are not attacked. Not to mention of course the bosses of the CEO's: the owners of the companies. Capitalists are often even richer than CEO's and in most companies earn a lot more in dividends and capital gains than the CEO does.

And, it must be emphasized, what business of Hägglund or some other left-wing populist is there if companies choose to overpay its executives (assuming for the sake of the argument that they are overpaid)? Contrary to general belief, it is not consumers or workers who pay CEO salaries. CEO pay have no effect on the marginal cost of any product so high CEO pay will not raise prices, and as it have no effect on the marginal benefit of hiring workers it will not lower worker's wages or lead to job losses.

No, the people who loses if CEO's are overpaid are the shareholders. They're the ones that should be upset if the CEO is overpaid, not workers, consumers and definetly not politicians. And it is for that reason the responsibility of the shareholders to prevent excessive CEO pay. And since again many shareholders are even richer than the richest CEO's it doesn't even make sense for an egalitarian to whine about high CEO pay.

Hägglund or other politicians should however not get involved in the dealings between private shareholders and CEO's.


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