Having been schooled at Chicago, considered an institutional icon in espousing free market and efficient market theories, I am always initially skeptical of things that fly in the face of efficient markets. This post by Douglas Smith, however, is excellent and reflects upon a WSJ journal article in which Treasury Secretary John Snow maintains the widening gap between high-paid and low-paid Americans reflects a labor market efficiently rewarding more-productive people.
Of course, I submit (perhaps a little unfairly given recent circumstances) Exhibit 5, to Douglas Smith’s list of exhibits. Joe Nacchio, former CEO of Qwest, was once in the top 10 of all compensated CEOs and earning in excess of $100 million/year. As a former shareholder in the firm, I think I saw my shares slip in value close to 50 times during his term (here’s an article from 2002 that adds some color to the craziness of the compensation situation). Although I recall Nacchio (or folks on his behalf or in defense of his raises) claiming that Nacchio deserved compensation competitive with what he could get elsewhere in the market, all I can say is that Nacchio was neither Larry Ellison nor Michael Dell in terms of delivering value to the shareholders.
This is not to say that I don’t believe in higher pay for senior executives. Executives have a lot of leverage created in part by their span of control. Tremendous value in excess of market comps can be created or destroyed in fell swoops. But questions remain as to whether businesses (and the people that run them) have put in place the right control and reward structures, as Douglas Smith’s post points out.