Outrage and the Highly Paid

Why do so many of us get so bent out of shape about CEO compensation, but not about that of other relatively highly paid people?

That is the central question explored by Cornell University's Kevin Hallock in his December workspan column "research for the real world", where he compares the growth in pay at the 95th percentile (top 5 percent) for CEOs and average U.S. workers to that of athletes in Major League Baseball, the National Basketball Association, the National Football League and the National Hockey League.  From 1995 to 2010, pay for this group of U.S. workers grew 69% while pay for the CEO group increased by 240% (one of those statistic that often provokes outrage).  But pay for top NBA athletes also grew by 240% during that period, and top paid athletes from the other major sports is shown as growing at rates substantially above the U.S. worker (with the 95th percentiles of pay for the NFL, MLB and NHL players rising 200%, 175% and 125% respectively). 

Why don't we hear comparable cries of outrage over those stats?

There are other fields of endeavor beyond business and sports where people are highly paid, and where the gap between average and top earners is similarly wide.  As examples of this, we can consider some of the figures that Forbes provides us for top earners in acting, writing and music.

Tom Cruise, as the top paid actor on Forbes list, earned an estimated $75 million in 2011. His female counterpart, Kristin Stewart of Twighlight fame, earned an estimated $35 million.

The two highest paid authors, James Patterson and Stephen King, earned a healthy $94 million and $39 million, respectively.

In music, Sir Elton John topped the list at $100 million, with Lady Gaga close behind him at an estimated $90 million.

This when plenty of actors, writers and musicians are earning practically nothing.

Why do we find the high pay of one group of workers -- CEOs -- so much more inflammatory than the high pay of others?  Kevin Hallock shares a few potential hypotheses in his column.  Could it be that CEO salaries are simply better known and more widely reported?  Is it because most people have a clear sense of the limits of their own athletic (or acting, writing or musical) abilities, where the "gifts and talents" a top executive brings to the table are harder for most of us to discern and appreciate?

What's your take? 

Image courtesy of themaroontiger.com

Comments

[Robert Edward Cenek]

You have posed an interesting question. If my memory serves me correctly, I believe that the research is mixed on the link between pay and performance at the CEO level. In many instances, pay packages are inflated due to cronyism among the Board members, effectively ensuring little oversight over questionable pay practices. The level of 3rd party oversight is increasing, such as that by such organizations as CALPERS - or regulations by the SEC or IRS - and this seems to be having a modest influence at best.

In sports and entertainment, the market more directly determines pay, with some mitigating influences, such as guaranteed pay contracts with sports figures. However, the key reason in my mind is that in our society we are willing to pay music, film and sports "entertainers" large sums of money for our viewing or listening pleasure. Whether right or wrong, most people don't attach the same amount of enjoyment to the individual performance of CEO's.

[E. James (Jim) Brennan]

If you have ever spoken to a sports General Manager, you would learn that there tends to be an even more tenuous relationship between performance output results in sports pay than there is in CEO pay. Athletes and entertainment performers get paid per personal negotiations where very little is openly disclosed except the outliers which are leaked to justify ratcheting pay upwards. Entertainment follows the Barry Bonds syndrome, where the fattest contract is used to justify eventually paying millions to folks who fail constantly.

CEO pay, on the other hand, escalates steadily if more modestly due to the surveys where everyone is of course "above average," the testimonial consultants are careful to survey only the higher-paying enterprises, and back-scratching compensation committees rubber-stamp ridiculous pay packages. Note that executive pay dropped when the economy suffered; that didn't happen to athletes and entertainers. But CEOs and CFOs don't sell themselves to the public like athletes/entertainers and don't get the media hype showing adoring masses of screaming fans. Good PR is essential for entertainers but the audience for NEOs is much smaller (shareholders), so the average citizen knows more about "stars" than they do about the people who pay their salaries. The famous entertainer gets placed on a pedestal and granted absolution for every offense (they "suffer from" things, remember) while the business head is seen as a remote fat cat who deserves to be taken down a peg or two.

[Joe]

I'm partial to your final theory; and while CEO pay may be "hard to discern," it's likely also the case that the spread in talent vs the spread in pay doesn't feel proportionate.

[Ann Bares]

Robert:

Interesting observations -- and I can't help feeling your last point sums it up relatively well, that our willingness to accept paying some individuals disproportionately large sums of money is directly related to our "appreciation" of (and, relatedly, our ability to appreciate) their performance. Well said.

Jim:

I'm not sure the relationship between pay and performance has been researched as rigorously for athletes and entertainers as it has been for CEOs, because wouldn't that be an interesting comparison? (Or maybe it has and I just haven't seen it - anyone?) For sure, all parties (and their respective "overseers") would be found wanting in terms of pay-performance connection. But at least some visible efforts are being made on the NEO front these days...

Solid point, not unrelated to Robert's above - few CEOs have been seen to have adoring masses of screaming fans.

Joe:

I think, to some degree, everyone commenting here seems partial to the final theory. And to your final point, are you hypothesizing that the "talent to pay spread" feels more proportionate for athletes/entertainers than it does in the corporate world? Another interesting question I wish we had data to explore....

Thanks all for the great comments!

[Mercedes McBride-Walker]

Great question, Ann. My husband, who used to work in 'the biz,' brought up the interesting point that star actors are the draw and therefore movie studios are willing to pay xx millions believing they will get significant returns on their talent investment. And consider, the first flop takes most actors off the list. The studios don't tend to make the same mistake twice. On the other hand, CEOs may have 'flop' after 'flop' and still get paid significant amounts of money. While the market checks entertainment and athletic talent, perhaps there is less of a sense of direct influence when it comes to CEOs, hence the outcry.

[Ann Bares]

Mercedes:

Thanks for the thoughts and the "inside the biz" insights. While it may indeed perform better in entertainment and athletics than in the corporate arena (again, I'd love to see some data on this), I'm not sure the market acts as efficiently in checking pay in these realms as you say. More than a few highly paid athletes and entertainers seem to move along the same (or still a significant) earnings level after one or more bad seasons and/or flops. In the entertainment world, examples might include Matthew McConaghy (after Sahara, a $24 million loss), Will Ferrell (after Land of the Lost, a $32 million loss), Julie Roberts (after Mary Reilly, a $35 million loss) -- even Bruce Willis seems to keep on ticking after an unusually long list of flops to his name (Hudson Hawk at -$45 million, North at -$33 million and Billy Bathgate at -$29 million, for a few).

All anecdotal, of course, but just in the spirit of the devil's advocate from one who is decidedly not "in the biz! Appreciate your weighing in and continuing the conversation!

[Mercedes McBride-Walker]

Great points all. Yet I wonder what the earnings were from those particular individuals to keep them going, meaning $32 M was only x% of what they made on y movie (or their portfolio of movies), for example. I know there are other actors (e.g., Cuba Gooding, Jr.) that lost their place on the list after the first flop. It's definitely an interesting conversation to help us all understand the dynamics and differences.

[Ann Bares]

Mercedes:

It is an interesting dynamic to consider - and you note one of the many ways that the pay of an actor, which will be tied to individual movies or other projects/endeavors despite a site like Forbes reporting it as an annual figure, differs from a corporate executive. Just one more reason that it is challenging to truly assess the data and understand the relationships between "earners" in different spheres of work.

Thanks again for prompting an interesting conversation from the original post!