# How 'bout we cap CEO salaries? **URL:** \ **Category:** Great Debates\ **Created:** [October 11, 2005, 3:36pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760 "2005-10-11T15:36:10Z")\ **Posts on this page:** 20\ **Page:** 3
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [October 11, 2005, 7:02pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/41 "2005-10-11T19:02:44Z")
> [@msmith537](#): > > Well that’s actually two different things. One is overall CEO compensation, the other is tieing compensation to performance. I certainly don’t think that CEOs should be able to make huge windfalls with golden parachutes while their companies go under. On the other hand, I don’t have a problem with CEOs taking part in the success of their company. Me neither. But the problem is that CEOs are benefiting when their companies are not succeeding - in fact are underperforming the industry. If you ever have done the difficult job of assigning raises, you will know that there is usually a limited pot of money, and those who outperform their peers get more. In CEO compensation there is not a limited pot, and there is no evidence that underperforming hurts compensation. Forget about the company dying, I think we’re concerned with those that are mediocre or underperforming. In these cases, there is no reason for the CEO to get better than the average raise and lots of reasons for him to get worse, since he has a lot more to do with it than Jane Mechanic or Joe Secretary. ---
**Author:** ![Lightnin](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/lightnin/32/180_2.png) [@Lightnin](https://boards.straightdope.com/u/Lightnin)\ **Post date:** [October 11, 2005, 7:03pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/42 "2005-10-11T19:03:23Z")
> [@Netbrian](#): > > Wouldn’t this just lead to them simply contracting everything out, or setting up a large number of companies with special relationships, so the lowest paid worker in the CEO’s company isn’t actually the lowest paid worker hired? Weird. I apologize, **Netbrian**. I never saw your post at all, and you’ve got a good point. I don’t know. I’m inclined to think that’s what would happen. Would those smaller, underpaid companies be able to stay in business, since the employees would be inclined to find more profitable employment elsewhere? ---
**Author:** ![tomndebb](https://avatars.discourse-cdn.com/v4/letter/t/b9e5f3/32.png) [@tomndebb](https://boards.straightdope.com/u/tomndebb)\ **Post date:** [October 11, 2005, 7:19pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/43 "2005-10-11T19:19:04Z")
> [@xtisme](#): > > Myself, I think the system we have, while not optimal, has done a pretty good job and I say would prefer not to mess with it unless something is seriously broken. And if we mess with it I would prefer the government with its hand of stone is selected as a last resort for a seriously screwed up situation. The system is seriously broken. It has been seriously broken for dozen years, or so. Claiming that it worked OK in 1920 or 1950 does not mean anything in regards to the way it (does not) work today. > [@Lightnin'](#): > > but why do you find it unworkable even as a thought experiment? Is it simply because there’s no way in hell any government official could get this thing passed, or is there some sort of technical or ethical problem? On those occasions when government has done well in economics, it has been through the implementation of _in_direct controls. Volcker finally stopped double-digit inflation by turning off the tap at the Federal Reserve after all the pleas and Executive Orders and legislation under Johnson, Nixon, Ford, and Carter to directly control inflation failed. Rent controls always lead to less housing and, ultimately, higher rents. If someone proposes a method of using government in a way that allows private individuals or corporations to bring themselves under control, I would consider it. Direct laws setting caps (regardless of the algorithm used) will simply send the C_x_O lawyers looking for loopholes. I really think that if institutional investors would reclaim their abandoned role as _owners_ instead of playing at investment, the situation would resolve itself. If you have a thought experiment that produces that result (with or without government interference), I’ll take a look at it. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [October 11, 2005, 7:22pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/44 "2005-10-11T19:22:36Z")
> [@xtisme](#): > > My lunch break is nearly done and I have a meeting coming up so I don’t have time to go through your link in detail atm…probably get to it tonight. As to your point, I wouldn’t expect the salaries and compensation of CEO’s to drop across the board due to a down turn in the economy. If they were good producers in the past there is every expectation that, once the economy picks up again, they will be good producers in the future. No real reason to immediately drop their salaries. No, not drop, but at least freeze. One of the cites I found said that a large portion of the slowdown in compensation came from the CEOs options being worthless, which is fair. If you compensate based on stockholder value, and your capitalization goes down, shouldn’t there be an impact? Certainly the increase in equity during the bubble was not based on what the CEOs did, but they never complained about profiting from it. That’s the source of the drive towards indexing option values. It could work both ways - if the market falls 20%, and your stock falls 2%, you should get some reward, right? An old VP of mine said that it doesn’t take any brains to do well in a boom - in a bust is the real test… > [@](#): > > As for my example being ‘bad’ I’m not sure I follow you. I selected a well known company that was easy to access both the CEO’s salary, stock options and company profitability. The fact that Gates is a founder is not relevant I don’t think…he’s still the CEO. If you think it would be ‘better’ for some reason to pick a different company and list the CEO’s salary/benifits vs company profitability I can certainly find other examples. However, they will all vary so, as I said before, I don’t know how meaningful it would be. Again, my take is that its up to the companies to decide whats best for them and whats best to maximize their profits. I have serious doubts that CEO salaries are paid based on whim with no expectation by the board of directors that a given CEO is best to maximize those profits, but feel free to provide Kimstu’s cite if you have one. Of course, it would need to be across the board, or at least a high percentage of companies who do so to be meaningful…I conceed freely that there are individual examples of companies doing all manner of stupid things. Generally such companies are the ones who eventually flounder and sink though. > > -XT First, if you proposed Bill Gates’ salary as the cap for CEOs, I’d happily go along. However he and other CEOs who are founders hardly need the salary. But let’s review how Gates got his stock. He and Ballmer founded the company. I don’t know if he had VC support, or if it came from Daddy, but he grew slowly, only really taking off when the IBM PC came out. (I used Microsoft Basic on my C64, and it was a good product.) When they IPOed Bill got a lot of stock, all well deserved since he made it happen. Contrast this to your more typical CEO, who had no stock on joining the company, and probably gets most of it from options or grants. Oddly enough most of the cites I find are heavily academic or from Europe or Australia. One academic one (which I will have to find again - my browser crashed) was the source of my statement about correlation of compensation with stockholder value but not profitability. It also said that the increase in stockholder value with CEO compensation kept getting smaller through the period 1993 - 1998, the period of the study. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [October 11, 2005, 7:31pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/45 "2005-10-11T19:31:44Z")
> [@Lightnin'](#): > > Mostly I just don’t understand it. In the story I cited, worker’s wages were being cut, while upper management’s wages were being _increased_, which seems totally bass-ackwards to me. Now, to be fair, management’s wages were being improved to give them incentives to not jump ship- but how many lower-level employees are going to hang on with their wages cut in half? Think about that policy for a second. If upper management drove a company into the ground, perhaps them jumping ship would be a good thing? (Or at least you could identify a bunch of them not doing a great job.) If the company is doing well, give the managers a raise to keep them. If it is doing terribly, give them a raise to not lose them during the crisis. I think Enron did the same thing. If you’ve ever done rating and compensation, you’d know that when firing someone is tough, you need to send a message with ratings and bonuses to those who you want to see the last of. You don’t give them raises! I’m not saying anything against you - you are accurately reporting the policy of many companies. ---
**Author:** ![Kimstu](https://avatars.discourse-cdn.com/v4/letter/k/ecd19e/32.png) [@Kimstu](https://boards.straightdope.com/u/Kimstu)\ **Post date:** [October 11, 2005, 7:35pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/46 "2005-10-11T19:35:36Z")
**Voyager** and **tomndebb** have provided several cites that indicate that the salaries of CEOs don’t reliably correlate with their firms’ performance. And this suggests fairly strongly that whatever is setting the numbers on CEO pay, it ain’t primarily the free market. So what is it? One group of economists suggested in a 2001 paper (Bebchuk, Fried, and Warner, “Executive Compensation in America: Optimal Contracting or Extraction of Rents?” [pdf]) that the free-market or “optimal contracting” model for CEO pay, in which boards simply pay their CEO whatever salary it takes to maximize their shareholder value, was inadequate. They found that current practices are better explained by a “rent extraction” model, in which CEOs have the ability to increase their salary above the “optimal contracting” level by directly influencing the salary-setting directors. (This is the cronyism/cartel/oligarchy effect, also called the “fat cat” theory, mentioned by several other posters.) The free-market model has been defended by other economists arguing (e.g., Murphy and Zabojnik, "CEO Pay and Appointments: A Market-Based Explanation for Recent Trends [pdf]) that CEOs are simply getting paid lots more these days because they’re worth lots more on the job market these days: specifically, they have more MBAs, more non-firm-specific transferable skills, and so forth. I don’t think these arguments do a very convincing job of explaining why CEO compensation keeps spiking upward even as the supply of MBAs increases, nor explaining why it remains high even with lousy company performance. Another explanation (Murphy, “Explaining Executive Compensation: Managerial Power vs. the Perceived Cost of Stock Options” [pdf]) suggests instead that while the optimal-contracting model is inadequate, the problem isn’t primarily “fat-cat” rent extraction. Rather, the chief problem is that accounting and cash-flow concerns make company directors underrate the costs of granting very high compensation such as stock options. I don’t know which of these explanations is the true one, and they might all be true to some extent. But it doesn’t seem plausible that **only** the free-market factors can significantly be affecting CEO pay, when other, anticompetitive factors are clearly involved too. ---
**Author:** ![XT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/xt/32/456_2.png) [@XT](https://boards.straightdope.com/u/XT)\ **Post date:** [October 11, 2005, 7:55pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/47 "2005-10-11T19:55:29Z")
> [@tomndebb](#): > > The system is seriously broken. It has been seriously broken for dozen years, or so. Claiming that it worked OK in 1920 or 1950 does not mean anything in regards to the way it (does not) work today. Can you list how you think the system is broken today, and how its substantially more broken than it was in the 20’s or 50’s? Also, what are the real world effects of this breakage? Do products cost more to consummers, are profits down, are more companies going bankrupt, is there a serious effect on the US’s productivity or on our economy? You are making a bald statement that the system is not working but you aren’t giving any details as to your thoughts. > [@Voyager](#): > > No, not drop, but at least freeze. One of the cites I found said that a large portion of the slowdown in compensation came from the CEOs options being worthless, which is fair. If you compensate based on stockholder value, and your capitalization goes down, shouldn’t there be an impact? Certainly the increase in equity during the bubble was not based on what the CEOs did, but they never complained about profiting from it. That’s the source of the drive towards indexing option values. It could work both ways - if the market falls 20%, and your stock falls 2%, you should get some reward, right? An old VP of mine said that it doesn’t take any brains to do well in a boom - in a bust is the real test… Well, I agree with you…compensation should be directly tied to the success of the company in a meaningful way. So yes, there should be an impact. But…how do you force companies to adopt this model? I don’t believe the government is the correct mechanism to do this, so what does that leave? > [@Voyager](#): > > First, if you proposed Bill Gates’ salary as the cap for CEOs, I’d happily go along. However he and other CEOs who are founders hardly need the salary. But let’s review how Gates got his stock. He and Ballmer founded the company. I don’t know if he had VC support, or if it came from Daddy, but he grew slowly, only really taking off when the IBM PC came out. (I used Microsoft Basic on my C64, and it was a good product.) When they IPOed Bill got a lot of stock, all well deserved since he made it happen. Contrast this to your more typical CEO, who had no stock on joining the company, and probably gets most of it from options or grants. Well, no…I gave Bill Gates as an example, not a model to base all CEO’s on. I was merely trying to show Gates salary/benifits vs MS’s profits. I do actually know quite a bit about Microsofts corporate history. You are right that not all CEO’s have the same situation…that wasn’t the point I was trying to make. Certainly many CEO’s are giving stocks and options, benifits packages and large salaries when they are brought in to run a company they didn’t found. I suppose the point is…why? Is it ALL about croynism, or do the companies have a real expectation that by offering so much that they will get a return on their investment in the form of more profits and more market share? -XT ---
**Author:** ![clairobscur](https://avatars.discourse-cdn.com/v4/letter/c/839c29/32.png) [@clairobscur](https://boards.straightdope.com/u/clairobscur)\ **Post date:** [October 11, 2005, 7:57pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/48 "2005-10-11T19:57:21Z")
> [@xtisme](#): > > But thats the thing…its up to the individual COMPANIES to decide what they think is best. -XT Problem is that many boards of directors include a number of other CEOs, and not many little stockholders. Are you really sure they’re making this kind of decisions in the best interest of the stockholders? By the way, I generally speaking think that very high incomes are counter-productive for various reasons, but I’m too lazy tonight to expand on this. ---
**Author:** ![Kimstu](https://avatars.discourse-cdn.com/v4/letter/k/ecd19e/32.png) [@Kimstu](https://boards.straightdope.com/u/Kimstu)\ **Post date:** [October 11, 2005, 7:58pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/49 "2005-10-11T19:58:29Z")
> [@tomndebb](#): > > If someone proposes a method of using government in a way that allows private individuals or corporations to bring themselves under control, I would consider it. Direct laws setting caps (regardless of the algorithm used) will simply send the CxO lawyers looking for loopholes. > > I really think that if institutional investors would reclaim their abandoned role as owners instead of playing at investment, the situation would resolve itself. If you have a thought experiment that produces that result (with or without government interference), I’ll take a look at it. Some institutional shareholders are trying to use their company stake to lobby for changes in corporate governance. The [AFL-CIO](http://www.aflcio.org/corporatewatch/paywatch/retirementsecurity/) has tried several strategies with companies where union funds are invested, including proposing measures to > [@](#): > > Restrict executives’ ability to cash out their equity awards; > Adopt a policy to limit executive severance benefits; > Recoup executive bonuses following earnings restatements; > Seek shareholder approval of preferential executive pensions; > Urge that the cost of stock options be properly accounted for [this bears on the third paper I mentioned in my previous post]; > Require performance benchmarks for vesting of restricted stock. Whaddya think of these solutions? Of course, shareholder resolutions are not necessarily passed and not necessarily adopted as company policy if they are passed, but is it a start? By the way, I’m not yet convinced that direct control by legislation would necessarily be doomed to fail. For example, the law might mandate that decisions about setting CEO pay be endorsed by larger shareholders, as in Sweden and the UK. Or is that more what you consider “allowing corporations to bring themselves under control”? ---
**Author:** ![Gangster\_Octopus](https://avatars.discourse-cdn.com/v4/letter/g/a8b319/32.png) [@Gangster\_Octopus](https://boards.straightdope.com/u/Gangster_Octopus)\ **Post date:** [October 11, 2005, 8:03pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/50 "2005-10-11T20:03:30Z")
> [@Kimstu](#): > > Well, I’m a human being with a reasonable, layman’s grasp of the economic concept known as “diminishing marginal utility”. As someone gets more and more money, the perceived value to them of every additional dollar decreases. That’s a basic economic law. Well, that is an absolutely wrong interpretation of “diminishing marginal utility”. Diminishing marginal utility refers to goods folks get utility from, not to money. There is no law of “diminishing marginal utility to money”, there is some experimental and analytical evidence that at certain income levels there may be even be an “increasing marginal utility to money” and at certain levels it is it may be diminishing, but there is no law of diminishing marginal utility with respect to money. ---
**Author:** ![zenith](https://avatars.discourse-cdn.com/v4/letter/z/e19b73/32.png) [@zenith](https://boards.straightdope.com/u/zenith)\ **Post date:** [October 11, 2005, 8:05pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/51 "2005-10-11T20:05:49Z")
A SUCCESSFUL company can pay their execs anything they please, but corporate bankruptcy laws need to change to disallow “midnight bonuses” such as the ones allegedly given to Delphi execs just prior to filing bankruptcy. Since the Bankruptcy Court judges seem disinclined to rescind and require repayment of large executive bonuses made within a year of bankruptcy filing, the law must change to take this out of their hands. BTW, they show no such disinclination when it comes to suspending hourly employee health care and retirement programs. I worked for a corporation that has since been gobbled-up by a Canadian firm that closed my plant and whose initials were said to stand for “People Come Second”. (Or is it “Petty Canuck C!!!suckers”?). The CEO of this former corporation made $3 million to supervise 7 plants 24/7 while I made $42K plus a generous benefit package to work an average of 48 hours/week in one of those plants. I didn’t feel the least bit “exploited”. However, if I’d had to spend sticky Florida days in a cartoon-character costume for a lousy $7 an hour and no benefits while Mr. Eisner pulled down hundreds of millions a year I’d have felt a whole lot differently. It would have made me a raging socialist! ---
**Author:** ![Kimstu](https://avatars.discourse-cdn.com/v4/letter/k/ecd19e/32.png) [@Kimstu](https://boards.straightdope.com/u/Kimstu)\ **Post date:** [October 11, 2005, 8:17pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/52 "2005-10-11T20:17:05Z")
> [@Gangster Octopus](#): > > Diminishing marginal utility refers to goods folks get utility from, not to money. Sorry, not so. There **is** also the concept of [diminishing marginal utility of wealth"](http://www.binarybits.org/archives/2003/11/in_which_i_caus.html), which is used to explain, e.g., apparently anomalistic results about expected values: > [@](#): > > And because of the diminishing marginal utility of wealth (the second $1M is worth fewer “utils” to most people than the first $1M), most of us would prefer to keep the money we have rather than gamble on a small chance for a large payoff. Hence, most people won’t pay very much money for the game, even though the expected value of playing is infinite. ---
**Author:** ![Cheesesteak](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/cheesesteak/32/3694_2.png) [@Cheesesteak](https://boards.straightdope.com/u/Cheesesteak)\ **Post date:** [October 11, 2005, 8:17pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/53 "2005-10-11T20:17:29Z")
> [@Kimstu](#): > > **Voyager** and **tomndebb** have provided several cites that indicate that the salaries of CEOs don’t reliably correlate with their firms’ performance. And this suggests fairly strongly that whatever is setting the numbers on CEO pay, it ain’t primarily the free market. So what is it?. The performance of sports teams is not necessarily well correlated with their payroll either, but I’d be hard pressed to say that athlete salaries are not set by a free market. I think the Executive/Athlete comparison is one that provides insight into why these guys get overpaid. The sports team sees the brass ring, a championship worth many, many millions of dollars in additional revenue. Not just from the championship itself, but the increased interest during the season and playoffs, more tickets, more TV viewers, more merchandise sold. The team sees that free agent player, that top pitcher, or goalie, or center and sees the **key** to that brass ring. They see that guy as the person who can put them over the hump, his value shoots up dramatically, as numerous teams bid for him to achieve the singular goal. They can try for incentive laden contracts, but players always go for the guaranteed money instead, and someone is always willing to guarantee. The individual cost/benefit analysis of each team doesn’t seem to do the trick. People known as clever businessmen wind up with unworkable payrolls and overpaid players. The only thing that really reigns them in is a salary cap. The owners themselves recognize that they cannot control their own spending, and usually fight to get salary caps implemented over the objections of the players. I think the same thing happens with CEOs and other high level execs. The Board sees these people as the key to getting high profits for the company, and the possible profits will completely overwhelm the higher price of the CEO. The big difference between Corporations and Teams is that team payroll is a very large expense, and thus more visible to management, and likely to cause serious financial problems for the team. Executive compensation is not generally going to make or break the company, but executive performance will. zenith, I like the way you think. ---
**Author:** ![Gangster\_Octopus](https://avatars.discourse-cdn.com/v4/letter/g/a8b319/32.png) [@Gangster\_Octopus](https://boards.straightdope.com/u/Gangster_Octopus)\ **Post date:** [October 11, 2005, 8:25pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/54 "2005-10-11T20:25:37Z")
> [@Kimstu](#): > > Sorry, not so. There **is** also the concept of [diminishing marginal utility of wealth"](http://www.binarybits.org/archives/2003/11/in_which_i_caus.html), which is used to explain, e.g., apparently anomalistic results about expected values: I never said there wasn’t the concept, I said there wasn’t a law to the effect. ---
**Author:** ![Kimstu](https://avatars.discourse-cdn.com/v4/letter/k/ecd19e/32.png) [@Kimstu](https://boards.straightdope.com/u/Kimstu)\ **Post date:** [October 11, 2005, 8:37pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/55 "2005-10-11T20:37:13Z")
> [@Cheesesteak](#): > > The performance of sports teams is not necessarily well correlated with their payroll either, but I’d be hard pressed to say that athlete salaries are not set by a free market. You would? I can think of at least a few factors involved in athlete salaries that are not present in an ideally free competitive market: **High entry barriers.** A perfectly competitive market is supposed to be easy for new competitors to enter, so that if the current widget manufacturers are overcharging the consumers, almost anybody else can get a cheap widget-making machine and undercut the competition. For professional athletes, though, the market is far from easy to enter. The number of openings is automatically limited, and if you want to increase it significantly you generally have to start a whole new team. In order to be considered by a pro team, you need experience in the minor leagues or equivalent, which in turn generally requires experience on a good college team, which generally requires experience on a high school team, and so forth. It is almost impossible for athletes outside this system to sell their services in the pro sports market, which is thus noncompetitive. **Externalization of costs.** Participants in a free market transaction are supposed to internalize all their own costs and benefits, in order for market forces to set the optimal price. If any of the total costs or benefits are distributed elsewhere, the price that’s set won’t be optimal. A sports team doesn’t bear all its own costs; some of them, like building and maintaining stadiums and so forth, are shared or entirely assumed by the municipality/state that sponsors them. So the team has extra money available to bid up player salaries. There are some other anticompetitive factors that might be involved in setting player salaries too, but I’d have to think about that some more. Still, I definitely wouldn’t call the professional athlete compensation process a genuinely free market. ---
**Author:** ![tomndebb](https://avatars.discourse-cdn.com/v4/letter/t/b9e5f3/32.png) [@tomndebb](https://boards.straightdope.com/u/tomndebb)\ **Post date:** [October 11, 2005, 8:38pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/56 "2005-10-11T20:38:46Z")
> [@xtisme](#): > > You are making a bald statement that the system is not working but you aren’t giving any details as to your thoughts. The only system that I have claimed is broken is that of management compensation. I have already provided a link to _Fortune_ in which numerous people provided evidence for that claim. Now, if you want to assert that executive compensation can be broken without having an impact on the economy, you are free to assert that, but challenging me on that point is irrelevant, since I have not made any claims of linkage. If you absolutely need a negative result from the situation, consider that any monies paid to an executive beyond what it would take to employ a competent executive is a waste of stockholders’ money. ---
**Author:** ![Kimstu](https://avatars.discourse-cdn.com/v4/letter/k/ecd19e/32.png) [@Kimstu](https://boards.straightdope.com/u/Kimstu)\ **Post date:** [October 11, 2005, 8:46pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/57 "2005-10-11T20:46:56Z")
> [@Gangster Octopus](#): > > I never said there wasn’t the concept, I said there wasn’t a law to the effect. Well, I’ve seen the phrase used by economists [pdf]: > [@](#): > > A cardinal value function is usually assumed to follow the law of diminishing marginal utility of wealth and therefore is strictly concave (see Figure 1). But in case what I said about it earlier was incorrect or ambiguous, I’ll clarify: There’s a concept called “diminishing marginal utility of wealth” which implies that a certain fixed sum of money has less value to its owner as the owner accumulates more money. This phenomenon is accepted by economists, at least qualitatively although not quantitatively (is that what you mean by saying that there’s no “law” for it, by the way?). Therefore, I think it’s reasonable to speak generally about wealthy people “not needing” comparatively small amounts of wealth. There, that’s what I meant to say. ---
**Author:** ![XT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/xt/32/456_2.png) [@XT](https://boards.straightdope.com/u/XT)\ **Post date:** [October 11, 2005, 9:21pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/58 "2005-10-11T21:21:25Z")
> [@tomndebb](#): > > The only system that I have claimed is broken is that of management compensation. I have already provided a link to Fortune in which numerous people provided evidence for that claim. Then I misunderheard you. Appologies. So, your claim then is that the compensation system ‘(does not) work today’, but that it worked in the 20’s and 50’s? Or am I still not getting you? > [@tomndebb](#): > > Now, if you want to assert that executive compensation can be broken without having an impact on the economy, you are free to assert that, but challenging me on that point is irrelevant, since I have not made any claims of linkage. Well, I’d say that its pretty obvious that, assuming the executive compensation is broken, that it isn’t having a serious impact on the economy or the strength of the corporations who are using the ‘broken’ system…yes? As I said, I didn’t understand fully what you were getting at so I’m not challenging you on this point as you didn’t make it. > [@tomndebb](#): > > If you absolutely need a negative result from the situation, consider that any monies paid to an executive beyond what it would take to employ a competent executive is a waste of stockholders’ money. Well thats true enough…if one can gage exactly what monies were paid beyond what it would take to employ a competent executive. Problem is determining that, right? -XT ---
**Author:** ![Gangster\_Octopus](https://avatars.discourse-cdn.com/v4/letter/g/a8b319/32.png) [@Gangster\_Octopus](https://boards.straightdope.com/u/Gangster_Octopus)\ **Post date:** [October 11, 2005, 9:28pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/59 "2005-10-11T21:28:01Z")
> [@Kimstu](#): > > Well, I’ve seen the phrase used by economists [pdf]: > But in case what I said about it earlier was incorrect or ambiguous, I’ll clarify: > > There’s a concept called “diminishing marginal utility of wealth” which implies that a certain fixed sum of money has less value to its owner as the owner accumulates more money. This phenomenon is accepted by economists, at least qualitatively although not quantitatively (is that what you mean by saying that there’s no “law” for it, by the way?). Therefore, I think it’s reasonable to speak generally about wealthy people “not needing” comparatively small amounts of wealth. > > There, that’s what I meant to say. Unfortunately the link does not work. And I would not go as far as to say it is even a generally accepted phenomenom among economists. When discussing cardinal utility function, then yes, it is frequently an assumption, but cardinal utility functions are not the primary type of utility functions used in microeconomic analysis. The first principles of classical consumer theory impose simply ordinal preferences and from these it is hard to find any inference as to the direction of marginal utility with respect to wealth. I am not necessarily objecting to the argument that there is a diminishing utility of wealth, just that aI don’t think it deserves (an nor do I think any economist would either) the wieght of having it described as a law, which is a somewhat important distinction in a rhetorical discussion. ---
**Author:** ![Kimstu](https://avatars.discourse-cdn.com/v4/letter/k/ecd19e/32.png) [@Kimstu](https://boards.straightdope.com/u/Kimstu)\ **Post date:** [October 11, 2005, 9:34pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/60 "2005-10-11T21:34:42Z")
> [@Gangster Octopus](#): > > Unfortunately the link does not work Sorry. [HTML version](http://216.239.59.104/search?q=cache:f7OY4yB9ojEJ:www.abs.aston.ac.uk/newweb/staff/docs/A0000480.pdf+%22law+of+diminishing+marginal+utility+of+wealth%22&hl=nl) better? [Previous page](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760.md?page=2) [Next page](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760.md?page=4)