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Record bonuses for bankers and traders after an exceptionally profitable year in the finance world have recently made the news. Some have been painfully trying to justify these sums (see this story: Rich people are needed - to have rich people around), but many realize that something is going wrong, and a pretty appropriate expression was to be found in this article: America's elite is pulling further ahead

it appears that surging CEO pay is only part of a broader trend in which star performers across a host of activities are breaking away from the average - and from even the nearly-star performers - to take an ever greater slice of the pie. This is the world of superstar economics, a winner-takes-all labour market, in which returns to talent at the very top have consistently exploded year after year.


"I am not sure it trickles down, but it trickles sideways," says Prof Gabaix. "The top CEO will hire the top surgeon and the top divorce lawyer."

The result is quite obvious:

the share of pre-tax income going to the top 1 per cent of Americans doubled between 1980 and 2004, rising from 8 per cent to 16 per cent. By contrast, the share of income going to Americans between the 90th and 95th percentile in the income distribution remained flat at just under 12 per cent.

In other words, the very rich are leaving behind not just the average American but the merely affluent too.

And it's an accelerating trend. Did you get a 15% raise this year? An 18% raise last year?

Leading compensation consultants expect the income of the average chief executive at an S&P 500 company to rise by 10-15 per cent this year, following an 18.5 per cent increase the previous year to $7m. CEOs of some of the biggest now earn up to $50m a year, while the going rate for the CEO of a top financial services company has reached $30m-$35m.

The average CEO now makes 369 times the average pay of workers. (An average which includes the extravagant incomes of the very top 1%, which amount, as we've seen to 16% of the total. So if you take just these 1% out, the CEO suddenly makes not 369, but 440 times the average of the other 99% - and a even higher ratio when compared to the median figure, i.e. the wages of the middle American.

And these extremes can be seen in other sectors. The article quotes baseball players (top paid to average has gone from 14 to 44 between 1993 and today), lawyers (top partners to lowly partners income ratio has gone up for 4-to-1 to 6-to-1 in the past 10 years) and, of course, financiers.

One point to note, of course, is the lack of oversight by shareholders, and the insane way remuneration packages are defined:

“There is a right amount of money someone like me should be paid,” argues the [anonymous - wonder why? ] chief executive of a large industrial company. “The problem is that I don’t know it and the investors don’t know it either. The best proxy is to go with the market for people in similar positions.”


many executives fault compensation consultants for driving a "race to the top" by recommending that every company should seek to ensure that its CEO is in the top 25 per cent on pay.

"It's mathematically impossible for everybody to be in the upper quartile," one compensation expert notes. "Pay consultants' league tables only help to ratchet up executive packages."

Yep, they all want to be paid better than the other CEOs, so they increase their pay each year, in a never ending rigmarole. But hey, talent is rare, and they are deserving, and markets are efficient, and companies are willing to pay.

Because the remuneration committees are made up of other CEOs?

Mr Greenberg, a staunch defender of the free market for talent, says it is in the interest of business to work with government to spread opportunity and help workers change jobs, in order to maintain support for globalisation, though he warns against anything that would “penalise success”.

It's always the same thing:

  • concentrating income helps generate more GDP, thus makes the economy more "efficient" overall;
  • thus it is possible for all to be richer, if steps are taken to redistribute that wealth;
  • but of course, any redistribution (horror, taxes, gasp, government meddling) "penalises success"
  • so nothing is done to add fairness to efficiency

And the only winners are the top 1%. But hey, it's "efficient". And anybody that complains is "protectionist" or "populist".

Originally posted to Jerome a Paris on Thu Dec 21, 2006 at 02:21 PM PST.

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