Ok, good point. I mean I can disagree with alot of your assumptions but at least it’s a perspective that actually answers my question and provokes my own thought. thanks.
Consider NFL football players. The mininum salary in the league is $310,000. The average is $770,000. The star players make multi-millions per year. Using your theory, there would be no need for owners to include EXTRA performance bonus incentives for their star players already making millions per year in base salary. Their base salary is already way beyond the %0.05 percentile.
Many CEOs probably think they are underpaid. The CEO I personally know makes over $1 million a year. He thinks he’s worth more and he’d like to make more. I believe him. Society would not be doing itself any favors by capping his salary.
You sure those aren’t salary cap workarounds?
Even the teams that don’t have salary cap issues write performance bonuses into contracts on top of base salaries.
Incentives are there even for stratospheric base salaries.
Ok, but would it reduce Tom Brady’s work incentive if he was now paid the league average and could only “max out” his salary if he met performance goals?
Money is one reason that people work for a living. It is not even the most important. If someone offers you more money to move jobs, would you work harder in the new job? Then you are admitting you did not work as hard as you could have at the first job.
People work for social reasons, for challenge, for creativity, for problem solving and lots of other reasons.
It may be that top executives compare pay checks as a measure of their relative worth. That is sad. We all know how more valuable a human being Paris Hilton is than we are.
It might.
If the league salary average is $770k per year, then personally for me, that’s not enough money to possibly suffer a brain-damaging concussion or blowing out my knees because a lineman missed tackling a rushing linebacker. If the salary was $7 million per year, then I might consider taking on the risks of brain damage and reconstructed knees.
Everybody’s calculus for effort expended vs reward (income) is different. Tom Brady might well play football for $1.00 a year and life in a wheelchair wouldn’t bother him in the least.
Why does he continue working if he’s underpaid?
Well, the alternative would be that he gets paid the max salary for a year long contract. If he doesn’t perform as expected, he isn’t re-signed.
I’m assuming you’re incentivized to work already. Now i’m curious as to why wage ceilings (keep in mind that back in the real world, and not in the artificial economics of the NFL, the wage ceiling is astronomical and we’re not talking about an average joe or even a learned professional butting up against it) decrease work effort.
The CEO I’m speaking of owns the company. Sorry for not making that clear.
Well, I live in the Bay Area, so I think the highly paid NFLers are definitely overpaid. Are today’s players really that much better than the players of 40 years ago, who had to work summer jobs? (In the AFC, at least, according to Madden.)
You have never said a more true statement than this. 
Are you both making the mistake that a sale of this home for $4.8 million would be counted as income? If the value of the house rose to $10 million, then we would be somewhere.
Are you claiming that the incremental value of a dollar for a millionaire - or a billionaire - is the same as that of someone making minimum wage?
Quite right. In attempting to see the larger point of that post, I missed the fact that there would be no gain on that transaction.
D’oh!
Ryan Seacrest just signed for 45 mill to do American idol next year. It all makes sense to somebody ,somewhere.
If you’re limiting all incomes, does that include proceeds from the sale of a business or an ownership stake thereof? That seems like it removes a lot of the incentive for an entrepreneur to grow their business beyond the point where its value hits the cap.
As a technical aside, the difference is only .4 standard deviations, but incomes aren’t normally distributed anyway, so the distinction is relevant here.
There is also a theorythat bosses are paid a lot not to motivate them but to motivate their underlings who want to get promoted to their place. Thus capping CEO pay will reduce the incentives of managers who want to be CEOs (and most will only serve a few years anyway).
This may sound like irrational playing of the CEO lottery, but
- there is a correlation between managerial effort and promotion prospects, and
- people do much the same thing in other areas of life. Most law students will not graduate but the high partner salaries draw a lot of people to try, including talent that would otherwise go elsewhere. Hence, capped salaries = fewer and crappier lawyers (not necessarily a bad thing
)
Ok, but this is still the point of my question: would they not be equally motivated to earn the capped income (lets just make a number and say 5 million) instead of an uncapped figure (say 50 million)
No, for many there is not equal motivation.
I think the problem is that you’re taking those large salaries and re-applying it to how the average person uses money.
I guess you’re thinking something like: a quart of milk is $4.00 at the grocery store, and a damn fine luxury car is $150,000. So $5 million already covers way beyond the everyday stuff and most luxury items so what’s another useless $45 million on top of that?
Well, it doesn’t work that way. As you get more and more money, your mind changes on how to apply larger sums of money. You stop thinking about items at the grocery store and think about how you can shape the world the way you want.
For example, one of my goals is to buy up the rights to my favorite copyrighted classical music and release them into the public domain. Well, $50 million isn’t enough money to do that. $500 million, maybe. $5 billion would probably be more useful for this purpose. To achieve that, I’d like the opportunity to make something for society that’s very valuable. It becomes so valuable that society pays me $5 billion. A salary cap would totally change the incentives on how I build up the money for my dreams. If YOU don’t think I deserve $5 billion, then don’t buy my offerings and tell all your friends not to buy my offerings. Impose a “salary cap” by way of consumer choices with their wallet, not legislation.
That’s how a lot of rich people think. They don’t need the next $100 million to buy another Porsche, they need the next $100 million to execute a grand idea that happens to cost $100 million. Are their pet projects worth doing? I dunno – and it doesn’t matter – you asked about work incentives not the validity of dreams.
Also most of these jobs aren’t the kind you work at for the rest of your life - they’re high-burnout, at least from what I know from my friends going into finance. You may be pulling down a few million for (say) five years, no more - which puts you at a high but not stratospheric level of lifetime earning. Capping pay would require a longer time commitment, which would dissuade those without superhuman endurance.