I don’t think it’s mysterious at all. For better or ill, the CEO can have a huge impact on a company’s profits.

So: we can’t guarantee an efficient and rational market for CEOs, but we can guarantee an efficient use of their salaries if the government takes a large portion of it.

I’ve never been quite comfortable with current executive pay levels, but I’ve also not been able to understand why owners and stock holders are willing to pay that much…

I don’t think it’s mysterious at all. For better or ill, the CEO can have a huge impact on a company’s profits. Hiring one CEO rather than another can make billions of dollars difference in the company’s bottom line. So it’s a false economy to try to save a few million dollars on CEO salaries. That doesn’t mean that spending more on CEO salaries is worth it, but it means that within a huge range of CEO salaries, getting the best CEO is higher priority than saving money on CEO salaries.

The CEO of Berkshire Hathaway is paid $100K/year. Teh guy likes to manage businesses, you see; that’s his idea of fun. According to wikipedia “…in 2007, he earned a total compensation of $175,000.” It’s a very big company, plenty of responsibility. It’s also a very successful company. Unless, of course, you measure success by the amount of dough funneled into executives’ bank accounts. By that measurement it’s a total failure.

I find it hard to believe that no company has succeeded in paying reasonable executive compensation and been rewarded for it without others following suit. Could the market have failed so thoroughly?

My own guess is that owners, stock holders, and those that companies must deal with to survive tend to use compensation as a metric for competence. Paying your executives what we would consider reasonable salaries signals to everyone that your executives are incompetent. (After all, if they were competent, they’d go elsewhere.) For businesses that depend on trading partners, that could be fatal.

One correlation that I have heard is that the compensation versus company size had remained roughly constant. It’s that companies are many times bigger than they used to be. Maybe you pay in relation to responsibility rather than to competence. Do supervisors of bigger school board earn more than for the same job in smaller school boards?

My suggestion is that real-world production can be better modeled with a Leontief function, where factors are combined in fixed proportions and so the entire marginal product can be economically attributed to any of them. The division of output is then the result of a bargaining, or more broadly social, process.

But if this is the case, how is this mysterious ‘added value’ measured? Iow, we know that there have been productivity gains of businesses as a whole by a certain reckoning. How do we know that the executive class are the ones responsible for these gains? Other than their say-so, of course. Especially given [1] in other parts of the large enterprise which are susceptible to such crude measurements.

[1]blorgs can be any part of a product or process of course; we’re not reduced to measuring only those outputs which are essentially handicrafts produced by a single person.

Nicely understated. Matter of fact, I reckon that there is hardly any blorg in a modern economy whose marginal output can be ascribed to one person’s (or one factor’s) contribution. If we had a productivity-o-meter, this whole discussion would not be taking place.

How would you know?