Wednesday, April 11, 2007

Disparity of income

From Wikipedia Disparity refers to the regional and economic differences in a country, province, state, or continent.

Ok, Wikipedia isn't the best reference material, but hey it works. Recently, I heard the phrase "disparity of income" and it was being related to CEO's. If you Google "disparity of income ceo" you get tons of hits. One of them indicates that the average CEO makes 431 times what the average worker makes. Some other sites say thuis number is higher. Regardless, it's high. Several of the hits declare that this disparity is undemocratic (another shot at republicans I guess).

But CEO/worker pay isn't the only disparity of income. The same is true in the sports world. A quick google again shows that a 2002 article finds A-rod making 125 times the lowest-paid major league benchwarmer.

It's also true in entertainment. Another google and the article says that the pay range is $75 to $75 Million. That's 1,000,000 to 1 range vs only 431 to 1 range for CEO's.

So, why all this disparity? And is it really undemocratic?

Part of the reason is disposable income. Americans have more of that than at anytime in history. When you last went to see a movie, or a ball game, did you HAVE to do that? No, of course not. But if you're going to spend $8 for a movie or $50 for a ball game, you want to be sure you enjoy it. And you can (and do) vote with your wallet. You won't go see a movie unless it has big names in it. If your team doesn't have a big hitter, you'd just as soon stay home.

Which gets us to CEO's. Stock-holders are just as picky as movie goers and baseball fans. They want the very best CEO that they can get. And they don't hesitate to pay for it.

Undemocratic, seems like we all vote with our wallets....


Neil said...

Good points. Wanting a "superstar" CEO is part of it.

The increased disclosure of executive pay - generally a good thing - actually fueled it as well, because everyone could point to others as justification for their package. It triggered the Lake Wobegon effect: every CEO is above-average, right? What board would hire a below average CEO?

Another problem is the influence gap between the average shareholders and those board members who select the compensation experts to determine executive pay. The shareholders might want lower CEO pay. And the compensation experts - surprise, surprise - are likely to recommend higher pay for the people who influence who gets hired as the compensation experts.

Randy Barnett said...

The Lake Wobegon effect.. I hadn't thought of that, but you're right.

Thanks for the comment. I checked out your blogs (both of them) and will be watching. They're both good...