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07 January 2010

Paul Volcker Interview & CEO's Salaries

"The American political process is about as broken as the financial system." - Paul Volcker

Here's a short article from Business Week that I think it's very much worth reading. It's very straight froward. Paul Volcker, chairman of the Economic Recovery Advisory Board and previous Federal Reserve Chairman, is one of those rare people who's ideas can be understood by someone with a 4th grade reading level (which I think is a good thing). I like this insight from near the end of the article:

"[Y]ou take the trading guy who says: 'I brought in $100 million worth of profits, therefore I want $25 million.'Have they really taken into account that this trading guy is going on [the firm's] reputation, capital, and risk when he went out there and made the $100 million? If he's so good, let him go out and do it himself."

When people get mad that CEO's get paid a ton of money I usually explain that prominent CEO's are exceedingly rare. Think about it for a moment. Then try to follow my weird logic.

How many NFL teams are there? Thirty two - at a minimum they have 30 guys per team that dress every game. That's 1000 people, and that's just football. There are only 500 CEO's on the Fortune 500 and by the time you get to the end of that list you're talking about people making less than a million dollars a year. The point isn't "poor CEO's." I think those at the top are probably far overpaid; this is the point that Volcker makes up above. My point is that becoming a CEO is crazy hard and the reason they get paid so much is that if they can do their job 0.5% better than the #2 guy and they run say Target with 52 billion in revenue (for 2006, same year as my Fortune 500 data) then that half a percent difference is equal to $260 million dollars. So the fact that Target's CEO got paid 40 million dollars that year is not crazy at all; at least to me it isn't.

If you add up the first 7 CEO's on the Fortune 500 list you get just over a billion dollars. To get the next billion in salary you have to add up numbers 8 through 30, and somewhere around #16 the salaries start to become somewhat homogeneous. It seems that a good CEO in America makes about $20-40 million a year. That's a lot of money. However, in the grand scheme of things how much is a billion dollars? Oh right; it's 1/14,000, .007%, or seven thousandths of a percent of GDP. The problems in our country are not soley due to CEO pay. It just makes us mad.

What Volcker is saying is that perhaps my way of looking at this is not the correct one, and to some extent I agree with him. It is very hard to accept that perhaps a very few people are so exceedingly talented that they do in fact deserve salaries of a quarter billion dollars a year.

And yes, I do feel dirty explaining the plight of the xenophobic rich white man.

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