CEO Pay Debate: Who Knows Whether $40M is Too High?

by: Mark J. Perry

Washington Post business columnist Steven Pearlstein thinks CEOs are overpaid, and writes about it unconvincingly in his column "Off Balance at the Top." He also appeared on CNBC's "Kudlow & Company" Wednesday night in this segment and said, "As a general rule, CEO pay levels are too high. $12 million is not outrageous, but $30 million, $40 million, $50 million, that's too high." Don Luskin then pretty much destroyed Pearlstein.

Comment 1: I guess that means that means Oprah is overpaid at $260 million, along with Tiger Woods ($112 million), Johny Depp ($92 million), Howard Stern ($70 million), Oscar De La Hoya ($55 million), Phil Mickelson ($51 million), Shaquille O'Neal ($35 million), Kobe Byrant ($34 million), etc.

Eugene Fama: If it’s a market wage, it’s a market wage. They may be big numbers; that’s not saying they’re too high. It’s easy to say that people are paid too much, but when you’re on the other side of the fence trying to hire high-level corporate managers, it turns out not to be so easy.

Thomas Sowell: Many people who have never run one business for one day are nevertheless confident that they know corporate CEOs are not worth as much as they are paid.

Comment 2: There's a very good reason for that average CEO pay has risen by a factor of about 7X from 1980 -2003: there was about a 7X increase in the market capitalization of large companies during that period (see red line in graph below for market cap, vs. blue/green lines for CEO pay), according to this forthcoming QJE article by NYU business professors Xavier Gabaix and Augustin Landier.