Wall Street & CEO Pay Issue Revisited
Am I being inconsistent? Or have I changed my mind on the issue? No, I am not being inconsistent nor have I really changed my mind (though I did err in not explicitly specifying the context), because the issue concerns two very different contexts: the context where high CEO pay can be defended is the context of firms competing in the market place. Wall Street companies today by contrast, are nearly all government subsidized enterprises. And that changes (almost) everything.
(Also, with regard to Wall Street companies, I was referring to the general pay levels, not just that of CEO's)
If you go back to the post you could see that I advanced two arguments for high CEO pay:
1. Because a CEO's decisions are so important for the well-being of a company, it is far more important to ensure that the most competent person is hired, than to minimize CEO pay.
2. If a CEO is overpaid, this doesn't really concern other employees, much less the rest of society, because the people who lose from it are the shareholders, not anyone else.
I still think these arguments are true, but only within the context of firms competing in the market place. With regard to Wall Street today, neither of these arguments are applicable.
Judging by their to say the least dismal performance, the extremely well paid people on Wall Street weren't selected on the basis of competence, but on other grounds, such as nepotism. In a free market economy, firms that hired people on such basis would eventually be weeded out as their objectively irrational hiring criterias would cause them to make decisions that made the companies go bust and out-competed by more rational companies.
But that hasn't happened, and the reason why this hasn't happened brings us to the other way in which the market context defense of high executive pay is not applicable. Namely, the fact that all of these Wall Street firms averted collapse because the government has bailed them out and now in effect pays for their continued operations.
Because Wall Street companies are now on government life support, this means that the people who lose if Wall Street employees are overpaid are the people forced to finance government, which is to say tax payers. And that means that there is a general interest to prevent excessive Wall Street pay.
And as these irrational corporate hiring practices persists because of the bailouts, this means that the usual case for tolerating higher pay (that higher pay will mean more competent employees) is no longer applicable. And that is the key fallacy of some libertarian critics of Wall Street executive pay limits such as David Kramer and Robert Wenzel makes. They don't realize that the competence argument for high pay levels isn't applicable here. Limiting executive pay in a sector dependent on government aid is really no different from limiting the amount paid out in welfare.
While we can presumably all agree that the key problem is the existence of the bailouts, it is simply not the case that government supported companies can be analyzed from the same perspective as market based companies.