September 5, 2014

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The Lie of Executive Pay For Merit: Tomas Pikkety

“The most convincing proof of the failure of corporate governance

and of the absence of rational productivity justification for extremely high executive pay is that when we collect data about individual firms (which we can do for publicly owned corporations I all the rich countries), it is very difficult to explain the observed variations in terms of firm performance. If we look at various performance indicators, such as sales growth, profits, and so on, we can break down the observed variance as a sum of other variances: variance due to causes external to the firm (such as the general state of the economy, raw material price shocks, variations in the exchange rate, average performance of other firms in the same sector, etc.) plus other “nonexternal” variances. Only the latter can be significantly affected by the decisions of the firm’s managers. If executive pay were determined by marginal productivity, one would expect its variance to have little to do with external variances and to depend solely or primarily upon nonexternal variances. In fact, we observe just the opposite: it is when sales and profits increase for external reasons that executive pay rises most rapidly. This is particularly true of US corporations.

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…The propensity to “pay for luck” varies widely with country and period, and notably as a function of changes in tax laws, especially the top marginal tax rate, which seems to serve as either a protective barrier (when it is high) or an incentive to mischief (when it is low)- at least to a certain point.”
Tomas Pikkety, 2014: Capital In The Twenty-first Century. Translation by Arthur Goldhammer.
Belknap Press of Harvard University Press, Cambridge, MA.

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editor @ 8:36 pm

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