Gabaix on CEO Pay

Greg Mankiw: Gabaix on CEO Pay

Greg Mankiw has a post about economist Xavier Gabaix. He shows the following chart from the Wall Street Journal:

Mankiw quotes Gabaix:

The sixfold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large US companies during that period.

Mankiw writes:

In Xavier's view, CEO's are earning the value of their marginal product. Top CEOs are paid high salaries because they are directing the fortunes of large enterprises, and even a small amount of extra talent is worth a lot.

……

Xavier's model encourages people to think of CEOs as similar to Tiger Woods. Woods makes a lot of money because he is really, really good at golf. He is not stealing from those companies that pay him millions for endorsements. To the people paying Woods for his services, he is worth every penny. Yet if Woods were taxed at 50 percent, rather than 35 percent, he probably wouldn't give up golf or forgo the lucrative endorsements. (Response from the right: On the other hand, at a higher tax rate, Woods might play fewer tournaments each year. He might retire earlier. He might take more compensation as untaxed fringe benefits, such as a cushy private jet to fly to tournaments. And so on.)