Patrice Ayme posted the following comment on my earlier post titled "The Poor Pay Czar:"
1) Self referential loops have proven a problem in logic. Should not they be a problem in the market, or is it that the market has nothing to do with logic? The CEO class, in the USA, is self referential. 2) Europe has now more big companies than the USA. Still, big European executives are paid at least ten times less than their USA equivalents. How come the market is so different in Europe? Is the fact that more compensation in Europe goes to talent located on lower rungs of companies, related to the higher performance of European companies in the last decade? After all, the total compensation being finite, paying more for talent at the CEO level means paying less for talent just below. An interesting aside is that CEO in the USA are much taller than average. Are size and compensation the only way they can dominate their subjects? A few years ago, Renault was all set to buy General Motors. At the last minute, though, Renault executives learned that GM executives intended to pay themselves more than ten times what Renault-Nissan executives were paid. So Renault scuttled the deal. US taxpayers are left with the bill: more than 60 billion dollars, no? (And GM will fail within a year or two.) It is true there are markets, and they can deal. But they are more or less free. There are not just markets. There are also classes too, and they can dominate, with extra market mechanisms. The CEO class in the USA sits on each others’ boards, determining each others’ compensations. In some other countries, this sort of incest is more limited (in others, it’s worse: China). In Germany, union representatives sit on boards. Generally those who really love their jobs will do them for free. Too much compensation is actually a distraction. And bad markets, thus exists. They are not just bear markets, they can lead to captive markets, and oligarchies…
My reply to Patrice:
Your view of markets is flawed, perhaps fatally so.
The U.S. labor market, for example, provides just the right incentives for individuals to work hard in order to improve the quality of their lives in ways that free people see fit.
There are some issues with that market in its current form, like minimum wage legislation and unions, but overall the U.S. labor market works quite well, particularly when viewed dynamically, through time, instead of as a snapshot at a point in time, as you seem to do.
Your comments ignore the fact that most CEOs work their way up through their companies, or in other companies, for many years, putting in long hours, sacrificing time at home and with family, in order to rise to the top, to take on the huge responsibility of guiding an organization to sustainable profits.
Right this moment, people are toiling away in industry at lower salaries, or in school at no salary, honing their skills, building relationships, learning about their industry, coming up with better ideas. A select few of these people will one day rise to become the CEO of a company, many of which do not even exist today. CEOs earn whatever the labor market, in its objective, efficient way, as disciplined by laws preventing fraud and by the instantaneous referendum on value creation represented by an active capital market, deems is justified.
Yes, there are temporary glitches in the functioning of the labor market, like Enron. Yes, there are unethical executives, like Maddoff.
But the fate of Enron, its executives, and Madoff is glaring proof that the markets in the U.S. work to ferret out the thieves and reward hard-working entrepreneurs and business people.