CEPR Nails It on Executive Compensation

ByPrimary Researcher

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Executive Summary

  • Executive Compensation is Completely Anti-Market

Introduction

Executive compensation must not be questioned in the US. According to Milton Friedman whatever executives make they “earn.” There is no such thing as a free lunch. Individuals should not get perturbed by the fact that executives who strip assets from companies and move production to countries that have no labor standards or pollution standards get $10 to $20 million per year, while hospital cleaners and child care workers (people who make an actual contribution) are paid less than $25,000 per year. After all, this is simply the expression of a perfectly functioning free market.

Executive Compensation is Completely Anti-Market

The Center for Economic Policy Research recently published an excellent descriptions of the actual way the executive compensation system works and how far away from a market it is. Actually, when was the last time that a $5 million dollar job was advertised on Dice.com? People who support elite interests continually make false statements related to the free market and get away with it, in fact, more than get away with it, they are quoted by others who consider them experts.

While those who advocate high pay for top executives undoubtedly like to call this a “free-market” view, this is an inaccurate description. The government establishes rules for corporate governance. These rules are very detailed in terms of the treatment of minority shareholders, disclosure of holdings and relevant financial information and on a number of other topics.
These government established rules, not the free market, allow top executives to largely determine their own salaries. It is politically advantageous to top executives to imply that their pay was determined by the free market, but this is not true.

The article also implies that the top executives at AIG are uniquely talented and possess the skills needed to maximize the value of the institution. There is no reason to believe this to be true. The people who selected the top executives at AIG picked people who bankrupted the company and ran up an amount of debt that has no precedent in the history of the United States. There is no obvious reason to believe that the other employees chosen by the top managers are AIG are more skilled than the ones who wrecked the company.

While those who advocate high pay for top executives undoubtedly like to call this a “free-market” view, this is an inaccurate description. The government establishes rules for corporate governance. These rules are very detailed in terms of the treatment of minority shareholders, disclosure of holdings and relevant financial information and on a number of other topics. These government established rules, not the free market, allow top executives to largely determine their own salaries. It is politically advantageous to top executives to imply that their pay was determined by the free market, but this is not true. The article also implies that the top executives at AIG are uniquely talented and possess the skills needed to maximize the value of the institution. There is no reason to believe this to be true. The people who selected the top executives at AIG picked people who bankrupted the company and ran up an amount of debt that has no precedent in the history of the United States. There is no obvious reason to believe that the other employees chosen by the top managers are AIG are more skilled than the ones who wrecked the company. – https://www.prospect.org/csnc/blogs/beat_the_press_archive?month=01&year=2010&base_name=there_is_no_free_market_in_exe