But let’s get beyond this “ludicrous” point and to the contention that if they “create” all this wealth, then they deserve a chunk of it. I could pretty well agree with that. But here’s the problem: do they really create the wealth? It’s “ludicrous” to place the success (or failure) of an entire multi-billion dollar organization in the (often-changing) hands of a single person — no matter how many hero stories we were exposed to as a kid. Academic research has shown that a sizeable portion of firm performance can be explained simply by industry structure — a superstar CEO busting his hump in the airline industry is simply less likely to turn massive profits, relative to a (luke)warm-body CEO in oil right now. That’s not to say there’s not within-industry variance — there is. But can we tie this to one person’s decision-making expertise? OK, let’s go all “ludicrous” and heroic and say we can. What of the bad decisions? Shouldn’t the CEO lose money? They don’t — they just get $10mil instead of $15mil. Or $100 mil instead of $150 mil. Look at the NYT pieces — look at the graph — it’s a blob, not a straight 45 degree line relating pay to performance. Besides, if you do have this straight-forward connection, you encourage accounting gimmickry and short-term focus — why invest in R&D this year, if it will make your numbers look bad, and not have potential payoff until 10 years from now (when most CEOs will be gone)? Or better yet, if pay is all about organizational size (assets under management), then you get consolidation crazes — and conglomerates are a mess, and acquisitions tend to fail. . . . and on and on.

Look, there’s just so many problems when you get beyond the easy and obvious point that pay should be tied to performance. Nobody’s arguing against that. What I’m arguing is that pay is not tied to performance. And the notion that they deserve hundreds of multiples of worker pay because they work harder is just ludicrous. There was a show once where they had CEOs try to fill some of the line functions in their massive corporations. They did miserably — they found out that the low-pay jobs take time, effort, and trouble. Read “Nickle and Dimed”, for example.

I feel CEO pay is excessive to a certain extent but if a CEO boosts a company’s revenue from $100 million to $400 million who’s to say he’s not entitled to a nice $10-15 million payday. He added tremendous value to the company and made lots of other people rich. Also, who’s to say that that CEO hasn’t been with the company for 20 years and worked his way up the ranks. In that case, he’s put in his time and is due a large payday for his dedication and hard work. It’s what everyone strives to do in their everyday lives, that final big payout.

There’s also the economies of scale to think about. CEO’s with large compensation typically run huge corporations. They just announced that the top trader for this year will earn over $1 Billion dollars yet no one is knocking him because his fund earned $3.5 Billion. So I say why shouldn’t CEO’s be paid accordingly? The realization is that when dealing with Billion dollar companies, the top people are going to be paid well. Just like the heads of hedge funds are going to be paid more if they have more money under management.

Let’s try to justify CEO pay, then, on the basis of the risks they take — they’re just smart risk takers, and smart risk-taking is immensely valuable for firms and their shareholders, so CEOs should be rewarded accordingly. Well, that’s crap, too. One can’t justify the huge rock-star incomes of CEOs on the basis of risk, unless these CEOs are risking their own money — and they aren’t. We are willing to allow folks in our society to earn huge sums of money, and feel OK about it, if they take huge risks — these folks are entrepeneurs, and since they put their own money at risk to get their businesses going, it’s OK for them to be heavily rewarded, up to and including the Bill Gates level. CEOs don’t put their own money at risk — they put ours at risk. You may (not as often as you should) see a CEO’s pay cut when his firm does poorly — say, from $25 mil to only $20 mil — but you won’t ever see him write a check for $25 mil to the company to cover those losses. So he doesn’t deserve the level of reward that goes with high risk. You could argue that his stock in the firm goes down, and so he loses that way. No — even if we forget about option backdating fraud, these are options, and he has put no money up (or gotten sweetheart loans where he’s had to put up a fraction of it), and so he need not exercise these options if they’re in negative territory. You could finally argue that he’s losing the potential value of these options, had they went higher, but again, this is punishment only by lack of reward, not by loss of one’s own money, and going into negative territory, as entrepreneurs could. The worst he’ll do is only make a few dozen times what the average worker does — and along the way, he’ll get plenty of perqs. Which brings up the final point I’ll blog about right now, and that is the notion that if Firm X doesn’t pay X jillion dollars for CEO Y, then Firm Z will. Let Firm Z suffer the winner’s curse — the odds are fairly even (see, for example: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=968464). But more to the point, the argument that you can’t attract a competent CEO without paying them rock star money is crazy. Suppose you’re the senior VP, and you’re getting paid, say, $300k. The firm offers you the CEO position, but says you won’t get a raise — you’ll get a nicer office, a nicer title, of course a nice resume boost, and so forth. Would you turn it down? I don’t think so. There’s enough attraction in being the head honcho that many folks would do it, even without the high pay day. Not that the current administration doesn’t completely disprove my point, but if we can attract a slew of folks to be US president at the current rate of $400k, which is twice what it was in the Clinton years, then surely we can attract CEOs, from the ranks of very eager experienced MBAs, without paying them tens of millions.