Tuesday, April 15, 2014

How Did Your Raise Compare With CEO Pay Raises?

Most Americans have not seen their paychecks grow very much in recent years.  The median raise for CEO's last year was 9%.  That increased the median income of CEO's to $13.9 million (exclusive of perks).  The growth in CEO pay, relative to that of most Americans, is one of the reasons for the rapid growth in income inequality in America. 

Economic theory suggests that CEO pay is determined by their marginal contribution to revenue.  Therefore, there is no reason to be critical of the growth in their income.  Economists who make that argument must live in a different universe.  It is impossible to measure the marginal product of most employees in a large corporation.  If one lives in this universe, the most obvious explanation for the rapid rise in CEO pay is weak corporate governance.  Corporate boards, working closely with compensation consultants, have rigged the system to yield the results that we observe. One of the contributors to this article was a compensation consultant who claims that he has turned into a critic to atone for his sins as top consultant.

There is not much that government can do to the change the behavior of corporate boards.  However, governments can make the tax system more progressive, and they can do more to collect taxes from elites who take advantage of tax havens.  That will not happen as long as most Americans remain silent.

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