Friday, January 9, 2009

Limiting CEO Pay: Fighting Norms

One of the more notable aspects of various financial bailout plans these days is the outrage at CEO excess and general wasting of money

-AIG's infamous "corporate retreat" after receiving $85 billion from the government*
-Auto company CEOs working for $1 a year
-Calls for CEOs to return their outsize paychecks

Basically, it comes down to this: if your company is being driven into the ground, you shouldn't be taking out a giant pay package, large enough to buy a private island . (Actually, according to that website, some of these CEOs have amassed fortunes large enough to buy several and clump them together to form tiny nations!)

And now we have Barney Frank proposing revisions to the TARP bailout to include more oversight, including provisions to limit CEO pay.

One of the likely arguments against this may be that CEO pay is actually a tiny portion of the $350 billion being lent out (actually, some CNBC commentators said that as Barney Frank was on Power Lunch, discussing the revisions). And, to be honest, those critics would be correct, at least on the surface.

However, letting the CEOs have their cake and eat it too may set a bad standard for the market place. If the government deems high CEO pay to be acceptable, then higher CEO wages will increasingly seem to be acceptable. You can look it as supply and demand, but where demand for CEOs increases dramatically simply because people think it should be rising and that it's okay to pay CEOs more.

We call it a "norm," or an unwritten social rule.

Then, rising CEO pay automatically starts factoring into wages of other high-earners (Vice Presidents?). You start to see a marked increase in inequality, and merely because we start to think of CEOs as rock stars.

So, if you think norms are an important part of the story in rising CEO pay, you can entirely be behind Barney's measure to limit CEO pay.

* And here are pictures of where that "corporate retreat" was

Note my previous post here. It's really more of a side issue.

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