Monday, March 20, 2006

Kent Budge asks the perennial question: why do bad CEOs get paid so much? I've always been stumped by this one too, but reading Tim Harford in Slate today, I found the most interesting hypothesis I've read in a long while.

Economists tend to prefer the insights of Edward Lazear, who suggested that young employees are often encouraged to perform by the promise of a cushy cruise toward retirement. Lazear realized that it is hard to measure and reward performance directly, but underpaying the young and overpaying the old tends to encourage effort. As long as there is some risk that shirkers will be sacked, workers will beaver away knowing that if they can hold onto their jobs, it will all be worthwhile.

Lazear also suggested that the boss's fat-cat salary is designed to motivate the lean and hungry young junior executives beneath him and has very little connection to his own performance. (Much is explained.)


Blogger Kent said...

Great post, Dave. Finally it's starting to make sense.

3/21/2006 2:02 PM  

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