# 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:** 8\ **Page:** 4
**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, 9:35pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/61 "2005-10-11T21:35:38Z")
> [@Kimstu](#): > > 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: It’s certainly not an ideal market, but the market is not encumbered by legislation that hampers the ability of each party to negotiate freely. The owners are free to offer or not offer contracts, the players are free to accept or not accept for any reason. I’m using “free” to denote that none of the parties are forced to make any particular decision regarding the negotiation, they act entirely on their own accord. Enact a salary cap, like in football, and the owners are now restricted, they are not free to offer contracts to any players their finances can afford. WRT to the market issues, the barrier to entry is similar in Executive-land. There are only so many prime jobs out there, new jobs require new corporations. You don’t get considered for a CEO job without doing your time in the “minors” either at a smaller company or as an underling with a large company. ---
**Author:** ![John\_Mace](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/john_mace/32/185_2.png) [@John\_Mace](https://boards.straightdope.com/u/John_Mace)\ **Post date:** [October 11, 2005, 9:40pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/62 "2005-10-11T21:40:15Z")
> [@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. I’ll confess to not having checked out your links, but can you clarify what you mean by “broken”? If CEO pay does not corrolate to comapny performance, I don’t see that as in indication that the sytem is broken. If we saw a negative correlation, then I think we could consider that the system might be broken, but I’m not sure it’s even that simple (CEO pay vs performance of individual companies and nothing else). ---
**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, 9:49pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/63 "2005-10-11T21:49:18Z")
> [@Cheesesteak](#): > > I’m using “free” to denote that none of the parties are forced to make any particular decision regarding the negotiation, they act entirely on their own accord. Okay, but I’m using “free” to mean a market that actually behaves like the competitive free market of economic theory. Potential for confusion here, hopefully averted. > [@Cheesesteak](#): > > WRT to the market issues, the barrier to entry is similar in Executive-land. Which also makes Executive-land not a genuine “free market” in the sense I’m using the term. I think this is an important point, because a lot of people use the term “market” rather sloppily and make fallacious arguments on the strength of that. They say “You can’t regulate such-and-such a transaction, that’s interfering with the market!” The implication is that because **free, competitive markets** are very efficient economically (as indeed they are), therefore we shouldn’t distort them with regulation. However, if the market in question is already significantly **non-free** and **non-competitive** , then maybe it’s **not** all that economically efficient, so the “don’t mess with the free market” prohibition doesn’t apply. In short, I don’t automatically trust arguments to the effect that “we shouldn’t regulate such-and-such because markets are more efficient than government”. I want to know whether a particular market actually **is** a reasonable approximation of a genuine free market, and whether it actually **does** operate efficiently or not, before I make up my mind whether or not we should regulate it. ---
**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, 10:02pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/64 "2005-10-11T22:02:12Z")
> [@Kimstu](#): > > 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? Yep, thanks. THis version of the [paper](http://www.abs.aston.ac.uk/newweb/research/publications/docs/RP0416.pdf) [PDF] seems to be easier to read with the charts ( is this what you were initially trying to link to?) Anyway, I am surprised she used the term law od diminishing utility of wealth since later on in the paper she discusses quite clearly how there does not seem to be any such law and certainly there is no consensus. Using Google this is the only reference I cold find to the “law” as such. Anyway, I don’t necessarily feel this is a big deal and worth either of us getting all worked up about. Sorry for interrupting this discussion with my pedanticism (is that a word?). ---
**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, 10:04pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/65 "2005-10-11T22:04:00Z")
> [@John Mace](#): > > can you clarify what you mean by “broken”? One way in which the executive compensation system is broken is that, as Bebchuk and Fried find in the research I linked to earlier, it doesn’t actually operate like a real free market. Therefore, anybody who argues that current executive pay levels must be optimal, because markets are efficient, is making a false assumption. Considered as a competitive market process, the executive pay system is definitely “broken”. However, I don’t know how much this applied before the past few decades, so I don’t know whether the system is basically any more “broken” now than it was then. I do know that executive pay has skyrocketed in recent years, but I don’t know whether or to what extent that correlates with “brokenness”. I too would like to know how **tom** responds to that. ---
**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, 10:05pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/66 "2005-10-11T22:05:31Z")
> [@Gangster Octopus](#): > > Sorry for interrupting this discussion with my pedanticism (is that a word?). No worries, I appreciate your calling me on a point I was unclear or misleading about. ---
**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, 11:51pm UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/67 "2005-10-11T23:51:58Z")
> [@xtisme](#): > > 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? Fair enough. From my reading it seems that executive compensation is not deductible - unless it is performance based. If it were made not deductible unless it was truly performance based, with some sort of test, that would help. I don’t think government caps are a good idea at all. More stockholder suits might help, as well as pressure from large institutional investors when low performing CEOs get big raises. More rules for boards fairly setting compensation would be good also. > [@](#): > > 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 Initial salary and continuing salary are two different things. To a certain extent starting salary is market based, and in most cases the board is not made up of cronies. There is no track record, so there can’t be performance based compensation. Continuing compensation - high rewards for poor performance - is the problem. ---
**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 12, 2005, 12:03am UTC](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760/68 "2005-10-12T00:03:21Z")
> [@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. Well, they are once you have free agency. It’s not a free market when owners used to refuse to hire ahtletes from another team without an owner initiated trade, right? Back then athelete salaries were depressed - now, with more of a free market, they are higher. But the real reason the situations are not analogous is that CEO salaries are not set by an independent owner. (Even after negotiation.) Instead they would be set as athlete’s salaries would be if the people making the decision were a set of athletes, well paid, some selected by the athlete whose salary is under discussion. CEOs are on compensation committees, right? Its clearly to their benefit to drive up average compensation, since they can then point to other CEOs as justification for big raises. [Previous page](https://boards.straightdope.com/t/how-bout-we-cap-ceo-salaries/325760.md?page=3)