Arnold Kling

Redistributing CEO Compensation

Arnold Kling, Great Questions of Economics
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What would happen if all of CEO compensation could be taken away and redistributed to shareholders or ordinary workers? Not much, according to Zimran Ahmen, who did the arithemetic.

total CEO pay in 1991 was $6B out of an organizational market capitalization of $9.1 trillion...if they were to work for free and all the money went to employees, the average employee salary would go up $54.

UPDATE: a reader correctly pointed out that $6 billion is a flow and $9.1 trillion is a stock. To equate the dimensions, multiply the CEO compensation by a price-earnings ratio of 25. Alternatively, divide the $9.1 trillion in market capitalization by 25. Either way, it is clear that if CEO's did the same work for free, shareholders would gain very little.

Discussion Question. Ahmed says that what is wrong with CEO compensation is that stock options are not indexed to close competitors. Why would such indexing improve the relationship between compensation and executive performance?

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