Sunday, March 2, 2014

CEO pay

Random nonsensical claim: "CEO's making thousands of times what workers make is unfair!"

BCL response: CEO pay actually seems quite small when considering what they actually do. For example, a CEO's decisions can make a company tens of billions of dollars worth of profit, or his decisions could lose them that amount of money. Isn't it worth tens of millions of dollars a year to save or make billions?

The highest compensated CEO is Lawrence Ellison of Oracle corp. He makes around $100 million a year. His corporation makes over $10 billion a year in net income. If you were a shareholder in that company, wouldn't you think hiring a CEO that could bring in billions of dollars of additional profit was worth the money? It's also worth noting that CEO compensation comes often in the form of stock options. Thus, they make even more money when their company does well. However, their incomes are more volatile than the incomes of most people since the stock market rises and falls every few years.

Since the decisions of CEO's have large consequences and only a few people actually have what it takes to be a competent CEO, we can analyze CEO pay as a function of supply and demand. There is a very small supply of CEO's that would be considered the best of the best, additionally, every major company wants the best CEO they can find. So when multinational companies worth billions of dollars bid on a small supply of worthy CEO's, it's no wonder why CEO pay is enormous.

On the other hand, there is a huge supply of workers who are seeking entry level jobs and many times there is not enough demand for all those people to be employed. In this scenario, wages should fall in order for the quantity of labor supplied to equal the quantity of labor demanded. However, price floors like the minimum wage make this unable to happen in certain scenarios. In the end, simple supply and demand can explain the difference of compensation between CEO's and entry level workers (or highly skilled workers) and whether or not people think that is fair is irrelevant. A company paying their executives and employees based on fairness is sure to go bankrupt

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