Quote of the Day on Executive Pay

Via Mark Thoma, Uwe Reinhardt* hits one out of the park on economist’s research abilities:

Evidently, in the mind of economists, Lone Ranger C.E.O.’s can make truly astronomical contributions to a firm’s market capitalization, ceteris paribus, which justifies high bid prices for them. Why Lone Ranger C.E.O.’s who have trashed their firm’s market capitalization should be sent off to pasture with hundred-million-dollar golden parachutes — which occurs with remarkable frequency — seems to be not much analyzed by economists. Perhaps other things did not remain equal. [emphasis mine]

Or, as Warren Buffett famously observed (roughly): “If a good manager goes to a bad company, it is generally the reputation of the manager that is changed.”** And even Michael Porter, who never saw a manager he didn’t like, recently changed his tune:

When Porter started out studying strategy, he believed most strategic errors were caused by external factors, such as consumer trends or technological change. “But I have come to the realization after 25 to 30 years that many, if not most, strategic errors come from within. The company does it to itself.”

Those of us who know that economists use thr phrase “technological change” because “magic” would get them laughed out of meetings can only say, “Gee, Really?”

Reinhardt also notes that Robert Frank cites the Gabaix/Lander “study” of executive compensation. Reinhardt notes:

Readers may wonder about the survival of this theory, even among economists, as stock prices have begun to tumble sharply, starting in 2007.

Since I don’t feel like retreading, here are links to PGL here in 2007 and Tom at the Legacy Blog in 2006, 2007, and 2008.

Reinhardt continues:

Readers may also wonder why, in the United States, the ratio of total executive compensation (including bonuses and deferred compensation, pensions and perks) to the comparable figure earned by non-management employees rose from 50 in 1980 to 301 by 2003 for the 300 to 400 largest corporations (and to 500 in very large corporations), while that ratio typically has remained so much lower in Europe and in Asia. Are corporate executives in Europe and Asia so vastly inferior to their American counterparts, or is the supply of potential C.E.O.’s so much larger there as to drive down the ratio in, say, Japan, to as low a 3?

Reinhardt promises to talk about the cl*st*rf*ck that is GE (last discussed by me here) in his next post.

Pass the popcorn.

*Note to Canadian readers:I’m told he’s the Bob Evans of Health Economists in the U.S.

**Of course, if Bob Nardelli trashes Home Depot and then goes to finish the trashing of Chrysler, he gets richer and it’s an outlier in the database (which has a growing number of outliers).

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