The Economist Speaks and No One Should Listen

I was always skeptical of my economics professors at Cornell. I simply did not understand their jargon and apparent lack of practical realities. I despised the ‘bell curve’ and its ability to explain away every market outlier and seemingly random event. Then I read, Naseem Taleb’s bestseller, The Black Swan – The Impact of the Highly Improbable. I finally had an economic theory for my natural skepticism. As Socrates described it, “I know that I know nothing“. So I was naturally amused when Cornell economist, Robert H. Frank expounded on CEO pay in his January 4, 2009 New York Times article (Should Congress Limit Executive Pay?), clearly a subject that Frank knows nothing about.

Professor Frank was happy to comment on both sides of the debate about curbing excessive CEO pay–a typical act of an impartial professor–but he came to the conclusion that the “most prudent response to runaway salaries at the top is to raise marginal tax rates on the highest earners, irrespective of occupation”. That might be one of the most shortsighted, politically motivated, take a chainsaw instead of a scalpel ideas I have heard in a long time (although one that Karl Marx would be proud of). He states that his plan would not compromise the price signals that steer talented performers to the most important jobs. How does he know that? Pure ego? Perhaps he has conducted a ‘bell curve’ study of all job seekers including, for example, Army recruits on how pay signals and relative tax rates drove their decision to enlist.

He also concludes that relative salaries drive job choice; another mind-bending statement. What would he say to the CEO who gets paid $1 in salary and the remainder in incentive pay, or to the person who chooses to be an artist instead of becoming an economist? One thing Mr. Frank is sure of is that, “CEO pay in the United States is vastly higher than necessary”. But if necessity was the only criteria for our existence, why not return to the Neanderthal period? We had a cave over our head and food on the floor.

After reading this article, I believe that professor pay (or at least Frank’s) might be vastly higher than necessary. The ivory tower types must understand–as I have over a 20 year career of matching executives and companies–that compensation (salary, short & long-term incentives and perks & benefits) is a highly negotiable and personal matter. One that government should stay far away from. Putting a monetary value on any job and matching that with an individual’s self worth is not something that government can–or should–legislate. Every time this has been tried, it has resulted in utter failure. There are so many factors that go into career choice and pay: job fulfillment, lifestyle, duty, geography, luck and who knows what else. I don’t and neither does Frank.