Why Not Arbitrary Limits on Executive Pay?

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Josh Marshall, in the course of making rather a different point, says:

As much as I think some exec paychecks are obscene and point to real imbalances in our economy, I’m really leery of limits on pay levels in private companies. To the extent that executives are paid too much, it seems like a broader issue of poor corporate governance, since shareholders shouldn’t be willing to pay executives obscenely more than they’re worth. But that’s sort of the point: shareholders, in practice, exert little real control over this sort of thing. (And I suspect, though I don’t know enough about this stuff to know, that that’s the case because in the post-1980 stock market, investors are much less concerned about the functioning of the companies — in a direct sense — than their ability to drive stock valuations.)

Some people, as I understand it, just don’t think inequality is a problem. But for the egalitarians among us, I’ve never really understood the view that obscene executive compensation is an issue that absolutely positively certainly must only be addressed through the indirect Rube Goldberg-esque method of changing corporate governance rules. What if we had a 95 percent marginal tax rate on income over $10 million? What dire consequences would flow from this? Perhaps a certain outflow of top-flight baseball talent to Japan. But I don’t see this leading to any kind of economic calamity. Producers of certain classes of supply-constrained luxury goods would lose out as their prices go down. But my strong suspicion is that at the end of the day most of the super-rich would ultimately find it a relief to get off the treadmill of status-competition and the not-quite-so-rich would be thrilled to see their betters cut down to size.

I’m prepared to be talked out of this view if Brad DeLong or someone can really lay it out for me, but I don’t see it for myself. If anything a de facto cap on compensation would probably make firms better-managed. The lack of ceiling on executive compensation creates bad incentives for firms to grow into unduly large conglomerates rather than be content to exist as highly profitable medium-sized enterprises, since bigger firms have higher-paid CEOs.

Meanwhile, check out Forbes‘s list of the world’s most profitable firms. BP, a British oil company, is fifth on the list. And their CEO earns earns more than double what Christophe de Margerie takes in as CEO of Total, the French oil company that’s 6th on the list. At 8th on the list is Chevron, whose CEO earns more than either of those guys. The salaries are being determined by the nationality of the enterprise, not the success of the enterprise.