November 16, 2022
Do CEOs Care About Income Inequality?
Recently, a management professor at the London School of Economics asked 1000 executives whether they care about income inequality and the societal problems it creates. The short answer is “yes.” Yet, the labor market for executives is so inefficient that they are unfairly trapped into being awarded millions of dollars per year.
This article in The Guardian summarizes the research. Here’s an excerpt:
It was evident from the results of our study that many executives take distributive justice very seriously. They engaged with the survey process, telling us about the amount of time they had taken to digest the questions and reflect on their answers. They agreed or strongly agreed with more principles of justice than they disavowed. The narrative comments that many of them provided were consistent with a serious ethical perspective on pay and inequality. We concluded that senior executives are not in the main the self-interested egoists of popular culture – some are, but most are not. Instead, they are the most fortunate beneficiaries of a market failure.
Economists have known for a long time that labour markets are different from other commodity markets. This is particularly true of the market for the people the French economist Thomas Piketty described in his book Capital in the Twenty-first Century as “super-managers”. An efficient market requires many buyers and sellers, homogeneous products or at least good substitutes, free market entry and exit, plentiful information and little economic friction. The problem with the market for top executives is that practically none of these conditions hold good.
The article concludes that companies are in an “arms race” for top talent – with everyone paying more than they need to in order to attract “super managers” and avoid the worst executives who could crater the company. Shareholders have supported compensation arrangements through advisory votes and other approvals (so, seemingly, they are happy with how things are going). But a lot of people think it’s not working out very well for society as a whole.
– Liz Dunshee