Globalization and Wages

The Economist's latest magazine focuses on the impact of globalization on inequality and wages. All and all, it's a solid report, but I have one major bone to pick: their argument that CEO compensation reflects true "value" in the market. They find it preposterous that CEO's might be overpaid, eventhough there is no evidence that CEO pay actually correlates with performance. Home Depot's $210m severance package for its failed leader being a most recent example. This is faith in markets ad absurdum, and plenty of business leaders would agree with me. Warren Buffet being the most revered.

Berkshire Hathaway has enjoyed a 41 year history with a compounded annual gain in book value of around 22%, an extraordinary achievement. In Warren's words:

Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay. The upshot is that a mediocre-or-worse CEO – aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo – all too often receives gobs of money from an ill-designed compensation arrangement.

I like The Economist. But it's dead wrong on this one.

Posted by Peter