Al Hunt’s op-ed in today’s Wall Street Journal (subscription req’d) uses the Grasso pay imbroglio to recycle virtually every grievance in the current left-liberal talking points guide, but lets stick to our knitting – i.e., corporate governance. Hunt complains that Grasso’s salary of $140 million is “indefensible” relative to what the “average worker” gets paid. (In a particularly invidious move, Hunt drags in the case of a wounded GI who had to reimburse the government for food during his hospital stay. While deplorable, its not clear what that case has to do with Grasso specifically or even executive compensation generally.) All of which raises the question: in thinking about executive compensation is the comparison to what average workers make a valid one or just a debater’s cheap shot?
If comparing what Grasso makes to the pay of an average worker is okay, then don’t we also have to compare what Shaquille O’Neal makes to that worker’s pay? If Hunt wants to argue that there is a dollar amount of annual earnings that nobody should be allowed to exceed, that’s one thing. But I doubt even Paul Krugman would go that far. Indeed, Hunt says that some folks – naming Tiger Woods, Kevin Costner, and Bill Gates – deserve their compensation, just not Grasso: "Most Americans are upwardly mobile and celebrate the riches of the truly successful and deserving, whether it's Michael Jordan, Kevin Costner, or Bill Gates. But in a time when sacrifices are being made by firefighters, schoolteachers and Marine staff sergeants, many of these same Americans resent the Dick Grassos." I don’t know why he thinks people resent Grasso's pay, but not Costner's. Has Hunt seen any of Costner’s recent movies? I mean, really. If any of the four he names should be joining firefighters et al. making sacrifices, it is Costner. Did you see "Waterworld"? or "The Postman"? Whereas nobody seriously doubts that Grasso was, at the very least, competent and most concede he was doing a good job.
But lets get serious about this for a minute. How much you get paid depends in large part on the thickness of the market for your services. In a thick market, wages tend to be low because there are many potential employees – all more or less fungible – competing for jobs. In a thin market, however, wages tend to be high because many employers are competing to hire a small number of eligible workers. The market for burger flippers is very thick. The market for law professors is relatively thick (so, for that matter, is the market for pundits -- if blogging has done nothing else, it has proven that people like Glenn Reynolds or Eugene Volokh can do punditry at a very high level even though they lacked access to a national medium until recently -- so maybe Hunt's mad because he's in for a paycut?). The market for CEOs of Fortune 500 companies (which is what the NYSE essentially is) is thin. I’d guess the number of people who have what it takes to run a Fortune 500 company isn’t much larger than the number of people who can run a NBA fast break. Its just supply and demand, folks.
Having said that, there are some important differences between Grasso’s and Shaq’s contracts, which do cut against the former. First, although I don't have the citations at the tip of my fingers, I have seen a couple of recent studies to suggest that boards erroneously believe the CEO market is thinner than it actually is, which tends to artificially inflate CEO salaries. Boards tend to want proven track records (picking an unproven CEO who tanks is bad for the board’s reputation), which limits the pool through the “Experience Required” phenomenon. Boards also tend to pick CEO candidates who resemble the prevailing demographics of the directors, which further artificially limits the pool.
Second, and more pertinent, Shaq is accountable in ways that Grasso was not. Shaq is subject to constant evaluation by Phil Jackson and Jerry Buss – neither of whom are shrinking violets. One has little doubt they make darn sure they are getting what they pay for. In contrast, although Grasso was nominally subject to evaluation by the NYSE board, that board was comprised in large part of ceremonial “public” directors who we now know did not take the job as seriously as they should have and representatives of the seat-holders who we have long known have various conflicts of interest. The board itself, moreover, was accountable to no one. So it all comes back to governance. In fairness to Hunt, he does devote a section in the middle of the screed to the governance issues. Contra the main thrust of Hunt’s column, however, the problem is not the dollar amount. The problem is that NYSE’s current governance structure had no mechanism for ensuring that the Exchange got back value commensurate with whatever amount it paid. Everything else is just so much populist agitprop.
