PHIL 270 Lecture 15: BE 3.24 (L) CEO Pay
4 May 2018
School
Department
Course
Professor
Business Ethics
3.24 CEO Pay
Why are there large firms?
- Transaction costs explanation - Coase
- Smith – division of labor
Why do they exist with shareholders?
- Raise funding for ideas
- Why not banks?
- Stockholders are more instrumental and invested in the company’s success
What are the risks with publicly traded firms?
- The owner no longer controls the hiring/firing of workers
- Division – shareholders, the boards of directors (hires the CEO and determines the pay), the CEOs – the
workers of the company
o No way all actors are aligned in ideology or whatever – why?
o Information problem – not everyone has the same amount of information
▪ Not even desirable for everyone to have such information
o Incentives problem – each worker, CEO, director have incentives that kind of align, but sort of
don’t
- Traditional reason for why economists get paid too much/too little – principal-agent problem
o Principal – voter, agent – representative
o Imperfect, slightly skewed incentives on the part of the agent
o Democracy is the imperfect solution to the problem
o Politics is a good analogy to markets
▪ The intentions of the agents are not really important, the rules of the game are more
important
▪ Tweaking the rules of the games will dramatically change results
The Economist article
- Markets work especially well when there are many transactions and there are many potential sellers of
services
- Is there a large pool of CEOs to draw from?
o Why not hire an unknown CEO who will boost performance?
▪ Signaling effect – to minimize risks
Podcast
- Politicians made it worse – CEOs pay skyrocketed under the Clinton administration
- Explanation
o Allowing companies to write off the pay of CEOs as a tax deduction up to a million dollars
o Accounting rule that allowed their stock options to not count as a cost – CEOS paid in the form
of stock options
- EX: 1940s, our president decided that certain people were making too much money, put a price cap on
how much those people could make
o Companies needed the talented people and needed them to continue working long hours –
companies paid them in the form of good parking spots, health insurance, life insurance, etc.
o The employers-provided health care system directly stems from that
o Employers who paid you in the form of health care – is tax-exempt
o Expansion of compliance agencies in businesses
Sowell – the Greed fallacy
Document Summary
Stockholders are more instrumental and invested in the company"s success. The owner no longer controls the hiring/firing of workers. Information problem not everyone has the same amount of information: not even desirable for everyone to have such information. Incentives problem each worker, ceo, director have incentives that kind of align, but sort of don"t. Traditional reason for why economists get paid too much/too little principal-agent problem. Markets work especially well when there are many transactions and there are many potential sellers of services. Is there a large pool of ceos to draw from: why not hire an unknown ceo who will boost performance, signaling effect to minimize risks. Politicians made it worse ceos pay skyrocketed under the clinton administration. Nobody is outraged by lebron james"s salary, but most people don"t think ceos deserve their salaries. Anyone with a talent that we can see we recognize the desert. Understanding the talent/work of ceos requires specialized knowledge.
