Tuesday, January 04, 2005

Cult of the CEO, Sociology Style

by Tom Bozzo

Still writing at Pub Sociology, Brayden King finds in some of his prolific Christmas break reading a link in the rise of a new corporate executive class, discussed further here. (Good laugh line in comments, and I'm not a sociologist, from Drek of Total Drek: finding a new social class is "sociological equivalent of claiming to have discovered a new sub-atomic particle.")

Brayden challenges the world to come up with a (reasonable) explanation for bloated CEO pay as an efficient outcome — other than from the perspective the CEOs. I agree with him that you probably can't, but a cursory search does yield some contrarian views: see, for instance, this review critical of Bebchuk and Fried's Pay Without Performance, which Brayden might want to pick up and I may now need to add to the reading backlog once I give up on my resolution to catch up on my reading before getting more books (I give it a couple weeks, tops).

As an extra-credit assignment, I'd suggest he take on the insinuation of corporate executive pay practices into academic management. The UW, notwithstanding flaps over ex-UW system president Katharine Lyall's extracurricular activities and efforts to run the UW Regents like a typical corporate board, is still bush league in this regard. But, for instance, David Roselle, president of my quasi-public undergraduate alma mater, makes something on the order of $700,000 a year, and private universities may well be cracking seven figures for some "famous for D.C." sorts of candidates.

It strikes me that, on its face, the sort of social network analysis Brayden sketches explains the political hacks better than the manager-academics. Like many academic executives, Roselle was previously a (math) prof before becoming an administrator, and I don't see as strong a role for "social matching and homophily" as in the corporate case, assuming that university trustees probably tend to resemble corporate boards somewhat in their compositions (various corporate plus political types).

P.S., of the Neal Stephenson oeuvre, I enjoyed The Diamond Age and The Confusion the best.
Comments:
Thanks for the book recommendations Tom. I'm always on the prowl for new reading material and those look right up my alley.

It seems there are at least two things going on here. The first would be the escalation of pay in a sort of irrational rat race. It's a bit like the Red Queen Paradox - you keep running just to stay in the same place. As long as everyone else is offering these kinds of compensation packages to their CEOs, your board feels compelled to do the same just so you don't lose status among investors. The same could probably be said of the hiring of university presidents.

I think the second order effect of this race, however, is to create pay standards that exclusively benefit the men and women (mostly men) who sit on those corporate boards. The market fails to reduce the incentives in those packages even after they fail to improve performance because social relations cause stickiness. The group (or class) becomes invested in that particular form of compensation.
 
Thanks for the comment, Brayden. I agree with both points you make.

A curiosity of the situation with academic managers I had in mind, and which your comment focused a bit, is that only a few universities seem to have very high-status academics (someone with a pre-existing reputation extending outside of their discipline and/or institution) for presidents. Harvard has Larry Summers, but Yale has Richard Levin.

This creates a somewhat interesting situation where mid-tier academics with management interests or aptitudes can vastly out-earn all but a few of the highest-academic-status stars -- not necessarily irrationally, of course.

Beyond academics, there's a broader push for businesslike management of public institutions and enterprises, of which businesslike managerial pay is usually an element. A good example is U.S. Postal Service reform, more than you'd ever need to know here -- where the Bush-appointed commission recommended pay for managers more comparable to large enterprises and, in effect, lower pay for the craft labor. Very corporate, but consistent with all of the stakeholder interests? Hmmm...

Again, there's a case to be made for not losing public-sector management talent to corporate pots of gold, but I wonder about the role of post-Reagan privatization religion. I'd be inclined to peg outfits like AEI and Cato as helping drive this, but don't know enough about the actual history of the drive to be sure.
 
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