The Real Story Behind Executive Pay

The Myth of Crony Capitalism

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Room with a view: businessmen watching the Occupy Wall Street Protests, May 2012. (Mike Segar / Courtesy Reuters)

As the share of income taken home by top earners in the United States has risen over the past few decades, so, too, has popular concern about economic inequality -- something the Occupy Wall Street movement loudly reminded Americans about in 2011. Much of the outrage has centered on the compensation of the United States’ top corporate executives, who are said to be taking home ever-fatter paychecks, while the incomes of lower-level employees have stagnated. “American workers are having to make do with less,” an AFL-CIO official complained to The New York Times last year, “while C.E.O.s have never had it better.” (Europeans have also gotten worked up over these issues, with the EU proposing rules that would cap bankers’ bonuses.)

Part of the problem, allegedly, is that the corporate boards that determine CEOs’ pay packages have severed the link between salary and achievement. Lucian Bebchuk and Jesse Fried, authors of the 2004 book Pay Without Performance, conclude that “flawed compensation arrangements have not been limited to a small number of ‘bad apples’; they have been widespread, persistent, and systemic.” Mihir Desai of Harvard Business School has claimed that skewed incentives for executives have fueled “the twin crises of modern American capitalism: repeated governance failures . . . and rising income inequality.”

Economists such as these argue that although CEOs are in theory beholden to the boards that hire and fire them, often the reverse is

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