CEO pay is back in the news. Harvard Economics professor Greg Mankiw offers a NYT piece on executive compensation and income distribution suggesting that the public is ok with large incomes of sports stars or actors (like Robert Downey Jr in Iron Man) because they understand how these people contribute. In contrast, understanding what executives add is much more complex. Paul Krugman responds, with an angry rant arguing that few of the top earners are stars or athletes and maintaining his position that executives are greedy and overpaid. This seems like a nice point to debate in a strategy classroom. Are executives overpaid? You might want to conclude the discussion with Alison Mackey’s SMJ article that applies actual data analysis to the question (instead of angry rhetoric). She found that “in certain settings the ‘CEO effect’ on corporate-parent performance is substantially more important than that of industry and ﬁrm effects, but only moderately more important than industry and ﬁrm effects on business-segment performance.” That is, in some cases, up to 29% of the variance in firm performance can be attributed to the CEO. In the case of a Fortune 500 firm, that could easily amount to billions.
Contributed by Peter Klein and Russ Coff