Monday, October 16, 2006

CEO's and Stewardship and Calvin

Greg Mankiw discusses an economic analysis of CEO salaries:
"Another aspect of Xavier's work, however, should appeal to those on the left: In his model, high CEO salaries are pure economic rents. CEOs are paid what they are worth to their companies, and their high pay reflects the extraordinary value of their talent, but the supply of talent is inelastic, and the allocation of talent would not be affected if everyone faced high tax rates.

Xavier's model encourages people to think of CEOs as similar to Tiger Woods. Woods makes a lot of money because he is really, really good at golf. He is not stealing from those companies that pay him millions for endorsements. To the people paying Woods for his services, he is worth every penny. Yet if Woods were taxed at 50 percent, rather than 35 percent, he probably wouldn't give up golf or forgo the lucrative endorsements. (Response from the right: On the other hand, at a higher tax rate, Woods might play fewer tournaments each year. He might retire earlier. He might take more compensation as untaxed fringe benefits, such as a cushy private jet to fly to tournaments. And so on.)"
If I understand, CEO's aren't that good, but because they have great leverage, they earn the big bucks. That is, when you have a corporation doing $20 billion, you don't want some George W. running it, so you'll pay just a bit more than $400K for someone who's a little better.

The idea of talent as "economic rent" is intriguing. Resurrecting the old-time religion, men were intended to be stewards of the earth they inherited. Suppose we say that people are stewards of their talents? That might bring us around to Andrew Carnegie, who's an interesting study. (New bio just out I mean to read.)

[Back to Mankiw] What's a CEO going to do except CEO? Woods can cut back on his playing and probably increase his gross, because he'll win a higher percentage of those he does play. CEO's can only retire. (Of course, if you consider a CEO as a multi-talented person, then she can find something else to do, so there is some point at which taxes would become too high.)

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