Mardi le 23 janvier 2007, par Peter Dietsch

Fury is often closely followed by fatigue. Whereas a severance package of over $200 million – as recently received by Robert Nardelli of Home Depot – would have made front-page news a while ago, it now merely elicits a bored yawn here and there. In one sense, this development has to be welcomed. Discussions about pay frequently degenerate into an all-round display of greed. With this newly gained distance to the subject, a more sober evaluation of the levels of executive pay might be possible.

The Economist‘s special report on executive pay contributes to this discussion (see In the money and following, January 18th). Whereas in the 50s, 60s, and 70s, the ratio of the median executive pay to average wages in the US was always between 20:1 and 40:1, since the year 2000 this indicator has rarely dropped below 100:1. Two phenomena are usually invoked to explain this rise: 1) the increased use of share options as executive remuneration, and 2) a governance structure that lacks teeth and allows executives to have a lot of influence on the board and thereby on their own pay package.

The survey puts forward a convincing case that even with these institutional flaws ironed out – the use of share options properly regulated, the boardroom made more transparent, and investors’ voting power shored up – executive pay will not on average fall: Good executives will earn more, bad executives will earn less. There are two conclusions one may draw here.

Firstly, and in accord with the magazine’s survey, current or even higher levels of executive pay are indeed justified depending on performance. The «market rate» for an exceptional CEO of a multinational corporation can easily run into the hundreds of millions of dollars.

Alternatively, one may think that if this is the market rate, something in the market mechanism has gone awry. After all, we should judge the market by its results. If it produces results that conflict with our sense of how the benefits of economic co-operation should be distributed, we should question the mechanism itself. Could it be that the price for managerial talent is inflated? In other contexts like the dotcom bubble or the housing market, the editors of The Economist seem to seriously entertain this possibility. Why not executive pay, too? Economists might even strengthen this case by pointing out that prices for labour tend to be significantly «stickier» than other kinds of prices.

Regarding executive pay, a blind trust in the market seems as little justified as in any other context. Perhaps those past excesses deserved theirs front-page status after all.