April 7, 2014 by David K. Sutton
CEO Compensation: Hey, They’re Paid What The Market Will Bear, So What’s Your Problem?
We are told CEOs are paid what the market will bear. After all, you should never mess with that invisible hand. Because, if you spend too much time looking into this, maybe you might learn the people at the top have been selling you a nice polished turd.
But even if we didn’t question CEO pay in the year 2014, I still want to know why highly successful mid-20th century companies paid their CEO’s less (inflation adjusted). Were CEOs in the 1950s or 1960s simply less productive? Did the market deem them less valuable when compared to the pay of the average worker? What has changed since then to justify CEO pay rising faster than pay of that average worker? Are workers not responsible for financial gains and increased productivity? The company fails to exist without its workers, regardless of the importance of the CEO position. And while workers are interchangeable, so are CEOs.
Even if I allow for the possibility that CEOs possess some magic mojo that makes them uniquely qualified for their position, this is hardly a justification on its own for ratios of 300-to-1 or higher when comparing CEO pay to the average employee. It’s a colloquialism to say, “The market pays what the market will bear,” and its one most oft repeated by those who benefit from its continued use.
But here’s the reality: CEO compensation is determined in a market where information and knowledge is not equally balanced among all participants. There are people “in the know” and people who are not. And the phenomenon I find interesting is people who are not “in the know,” who benefit nothing from rising CEO pay, nonetheless singing its virtues.