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Inequality and Superstars

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Inequality and Superstars

Eduardo Porter wrote an article, adopted from his book “The Price of Everything: Solving the Mystery of Why We Pay What We Do”, in this past Sunday’s New York Times. While it might be unfair to criticize an article that is a summary of a much larger analysis; nevertheless, I proceed to do so, recognizing that some of my criticisms might be addressed in his book.

The focus of his article is on the compensation of superstars in sports, entertainment, finance and business. If we take a look at a real list, one that includes criminals and quasi criminals (kleptocrats), of the wealthiest (100, 500 or 1,000) people in the world, likely we will find very few traditional superstars on the list. Kobe Bryant, Tom Brady , Leonardo DiCaprio, Lady Gaga, Lloyd Blankfein and Rex Tillerson will not be on this list.

Two groups will dominate the list: individuals who founded and built successful companies, or the families of such individuals (e.g. the Walton family), and individuals who stole/privatized the wealth of their countries (kleptocratic leaders, their families and close associates). There will be a sprinkling of royal families (the original kleptocrats) and a small number of superstars, primarily in the realm of finance. The two surest ways to wealth are to create something (Microsoft, Google, Intel, Oracle, ArcelorMittal, Walmart, Ikea, etc.) or to steal. Obviously, we know which route is more conducive to economic growth and prosperity,

Porter claims that the globalization of markets has expanded the potential for superstars by increasing the demand for their talents. This in turn has greatly increased their incomes, both in absolute and relative terms. But there is the flip side. Globalization also has increased the supply of potential superstars. Why hasn’t the supply kept up with the demand to keep the incomes of superstars in check?

With the exception of individual sports (e.g. tennis, golf, skiing), a superstar alone does not guarantee team success. If this were the case, Lebrun James would still be playing in Cleveland going for a “Four-peat”. A superstar needs to be surrounded with a good team, one that has the talent to leverage the talents of the superstar, for the team to win.

In the world of business, CEOs are lavishly compensated, not necessarily for their talent, but because of how the compensation game is structured. If most CEOs were in fact superstars, then why have so many companies performed poorly or failed? Perhaps, CEOs surround themselves with weak teams. Isn’t this though a reflection of poor judgment on the part of the CEOs? And why should we consider CEOs with poor judgment to be superstars?

Or maybe most CEOs are not just that good. Then why are they so richly compensated, and why is the gap between the pay at the top and the pay in the middle and bottom of companies growing?

The compensation game is set up to ensure these outcomes regardless of the real abilities of CEOs. Directors of companies protect themselves by hiring consultants who advise them to pay their CEOs in the top 10-25% of all CEOs. Statistically this is an impossibility for all companies, and so compensation spirals endlessly upwards.

The same mindset – protecting oneself from personal liability for possibly bad decisions – has resulted in extravagant compensation for top brand consultants, lawyers, accountants, investment bankers. Hire the best and pay them excessively because someone else (the company) is really bearing the expense, and this offers a great defense in case anything goes wrong. How can a director or CEO be criticized for hiring a McKinsey or a Goldman Sachs or an IBM?

Income inequality is not necessarily detrimental for the social stability of a country or its economic prospects, as long as it is based on meritocracy and there is a large and vibrant middle class. Income inequality is detrimental if it is based on privilege, theft and/or gaming the system.

The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.


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