Friday, June 28, 2013

CEO Compensation Has Outpaced The Average Growth Rate Of The Top 1%

Greg Mankiw dismissed the argument that the rapid rise in CEO compensation is due to poor corporate governance, or what he called market imperfections.  He referred to a paper presented by Kaplan at the NBER in honor of Martin Feldstein.  Kaplan presented data which showed that CEO compensation was similar to that of other high wage earners in the top 0. 1%.  Therefore, the labor market for CEO's and other executives is competitive.  There are no market imperfections.

This article provides a critique of the Kaplan study and shows that CEO compensation has risen faster than the average compensation of the top 0. 1%.  Moreover, there is no direct way of measuring a CEO's contribution to corporate productivity.  Therefore, it is wrong to conclude that the rise in CEO compensation reflects growth in CEO productivity.  In fact, with few exceptions, there is no easy way to link the compensation of most salaried employees to their contribution to corporate output.  What is the contribution of accountants, or corporate lawyers to corporate output?  The link to productivity and compensation is a holdover from an age in which production workers were paid in relation to their output which could be easily measured. 

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