Megan McArdle, liveblogging from the Berkshire Hathaway shareholders meeting, reports that Warren Buffet was asked about executive compensation. Buffet gave his usual answer: that CEOs are able to nab undeservedly high pay packages from pliant compensation committees. But Megan points out, there’s a problem with this narrative:
[P]rivate companies pay their managers even more. It’s riskier compensation, of course, and it’s plausible to argue that all of the extra pay is a risk premium. But if CEOs were only getting paid so much because they’d captured the boards, you’d expect to see private companies paying less. You’d also expect to see incumbents making more than CEOs recruited from outside, but you don’t.
It’s hard–nay, impossible–to believe that cosy [sic] board relationships don’t inflate CEO pay. But the effect doesn’t actually seem to be that large.
Great points. Buffet’s account, which is gospel to most CEO pay critics, just doesn’t square with the facts.
But I’ve got a question for Megan: Why is it so hard–nay, impossible!–to believe that for-profit companies could actually be making profit-maximizing decisions when they sign off on executive pay? On a free market, the idea that shareholders would chronically invest in companies that shower undeserved rewards on management makes no sense.
Now, it’s true that we can find plenty of cases where incompetent managers are able to make millions year after year–but that’s precisely because we don’t have a free market. Government intervention, for instance, has made hostile takeovers virtually impossible, shielding many an inept CEO from market forces. Megan’s perspective is not all that surprising given today’s heavily regulated market.
High CEO pay per se is not a problem. Only pay distorted by government force is a problem. Under true economic freedom, there’s no reason to think we would have some intractable problem of CEOs getting paid, not for their ability to create wealth, but for their ability to schmooze favors from board members.
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