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Monday, September 17, 2007

In Defense of CEO Compensation

An article sure to increase my popularity the next time I do Oprah's show. Be sure to skim the comments. The TownHall posters' economics skills are a little scary for what I thought was supposed to be a "right wing" site.

3 comments:

  1. That would be a valid defense of executive compensation in a free market--but in a free market, it would probably be moot, because there'd be a lot less astronomical executive compensation to defend in the first place.

    If you at least stipulate for the moment that the dominant firm is larger and more hierarchical than it would be in a free market, then such "excessive" CEO pay is arguably the result of calculational chaos within the corporation. The threat of hostile takeover, if anything, only makes things worse, because absent any reliable metric of corporate performance short-term profit tends to be used as a proxy. So the possibility of hostile takeover and the short time horizons of corporate management lead to exactly the kind of behavior Nardelli was accused of: milking the operation and stripping it of assets to inflate short-term profits, while gutting the productive resources for long-term growth.

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  2. Kevin,

    I am open to the possibility of what you're saying, but can you point to what exactly causes the short term thinking? People I worked with in the financial sector agreed with that view, but I never understood why it would persist. I.e. why wouldn't a few companies with long-term vision outperform?

    Or, if it's something to do with the corporate structure per se, why wouldn't that structure die off, with more and more firms being taken private?

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