Sunday, July 09, 2006

CEO Compensation and the Minimum Wage

While reviewing the blogosphere for opinions on the ongoing minimum wage debate, I found that more and more advocates of raising the minimum wage are focusing on the growing gap between CEO compensation and the minimum wage, which prompted me to ponder the relationship between these two metrics. I guess I'm supposed to be outraged by the fact that CEOs make so much money, but I'm not. I guess I'm also supposed to be outraged by the fact that the minimum wage has not kept pace with CEO compensation, but I'm not. What does one have to do with the other?

If your objective is to help the working poor, then the best way to do so is through an expansion of the Earned Income Tax Credit, as I have pointed out on more than one occasion recently. In striking contrast, raising the minimum wage is not likely to have any impact on the working poor, since most of the working poor actually make much more than the minimum wage. That's one issue. The other issue is how much CEOs make.

While statistics can be very misleading, I am willing to accept, arguendo, that CEOs make pretty good money. However, if a CEO makes a company profitable, then he or she is worth more money. On the other hand, if a CEO is running a company into the ground, then he or she should make less money or even be fired. If the board of directors for a company fails to observe these basic principles, they will either (a) be unable to attract qualified CEO candidates or (b) lose the confidence of stockholders and (thus) lose control of the company.

Because of the enormous competition for qualified CEOs in the United States, the compensation for those CEOs is seldom tied to performance. Consequently, once someone lands a job as a CEO at a particular company in the United States, they are usually free to run that particular company into the ground while lining their own pockets. In practice, however, few CEOs actually do this, and the astonishing rise in compensation for CEOs in the United States is a result of the fact that already large companies continue to get bigger and bigger, thereby increasing competition for the small handful of truly qualified CEOs.

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