Is There A Management Bubble?

Posted by: Mark Gimein on October 21, 2011 at 1:45 PM

ows_bubble.jpg

One of the most prominent thinkers on income in the United States is Berkeley’s Emmanuel Saez, a French trained economist who, with his collaborator Thomas Picketty, has done some very comprehensive analyses of the subject. The best known finding of their work is that around 1982 incomes of those at the top—the top 10% and especially the top 1%—started diverging dramatically from those below at an accelerating rate. Saez and Picketty’s charts illustrating what’s happened to incomes in the US and other countries have been widely publicized, and you can dig into their data in the new international database of top incomes.

Though his work has been a major influence in the wealth debate, Saez’s voice has not been as prominent as some others recently—perhaps in part because he has been careful about drawing hard conclusions about just why this shift has taken place. There’s one reason he suggests, though, that hasn’t gotten much play and should scare folks in the upper end of the income distribution: it’s that executives could be benefitting from a management pay bubble.

Corporate executives and managers, as well as some economists, like to think that the increasing pay of senior employees has to do with increasing returns for their specialized skills. Over email, Saez offered me a much less flattering explanation: it’s not that managers have become more valuable. It’s that, as he puts it, there’s no good way to measure objectively the productivity of an executive. That lends itself to what Saez calls “bubble phenomena” in their perceived value—to put things bluntly, they benefit from being seen as more important than they are.

If that’s the case and managers do not have some special growing value, then the same forces that have put pressure on wages lower down the ladder—labor mobility, ease of hiring and firing—will eventually apply to them, too. We may already be seeing the beginnings of that with CEO salaries. Whether in a slow seep or a big bang, every bubble will deflate.

Reader Comments

jg

October 21, 2011 3:23 PM

That chart link is interesting. The divergence is really dramatic in the 80s and keeps going steadily upward to the present.

Rich

October 21, 2011 3:26 PM

CEO salaries are a broken system! If they are part of a bubble, deflation of the bubble can't happen too soon.

MJ

October 21, 2011 4:06 PM

CEO's sit on the boards of other companies and vote each other pay raises. It's collusion plain and simple.

Douglas

October 21, 2011 5:28 PM

Recommend "Corpocracy" by Robert A.G. Monks. Moderate republican, former corp lawyer, etc - best book on the subject.

Marguerite

October 22, 2011 1:56 PM

First they came for the communists,
and I didn't speak out because I wasn't a communist.

Then they came for the trade unionists,
and I didn't speak out because I wasn't a trade unionist.

Then they came for the Jews,
and I didn't speak out because I wasn't a Jew.

Then they came for me
and there was no one left to speak out for me.

Pat McGroin

October 22, 2011 6:52 PM

"If that’s the case and managers do not have some special growing value, then the same forces that have put pressure on wages lower down the ladder—labor mobility, ease of hiring and firing—will eventually apply to them, too."

Possibly...but I doubt it. Who decides what to pay top executives? Boards of directors. And what kind of people sit on BOD's? Mostly executives at other firms.

As long those in the exclusive "Executive Club" are deciding how much to pay their fellow members, there doesn't seem to be any reason why they would stop gorging themselves at the corporate trough.

The only way to put a curb on it (for publicly owned companies, at least) is through concerted action by large shareholders. Money talks...and as long as their biggest source of funds keeps quiet, the "Captains of industry" will keep doing what they're doing.

Geoffrey Henny

October 23, 2011 10:05 PM

Some of this can be explained by the fact that the top 1% have gotten control of arbitrage systems that leverage the differential between the pay of the OECD middle class and the pay of the non OECD middle class. The fact is the former get paid five times what is paid to the latter even though both groups have access today to the same level of education, technology, communications and global production systems. In a world of free trade this is not sustainable in the long run. Much of what we perceive as an economic crisis in the US, Europe and Japan follows from this reality and is already having some fascinating consequences. Another major factor is the power of automation and intelligent software. This is leading to a massive transfer of wealth from labor to capital and growing unemployment. Unless we address these issues with taxation and reverse transfers - which will be fought politically - we are all in for a rocky road. The long run may be that the world becomes a fairer and more socially just place where the real 99% (the developing country poor and middle class) do better, but it will be tough on our middle class for a generation. In any case, as Keynes said, in the long run we are all dead.

Robert

October 23, 2011 10:20 PM

Yes, Board pay CEO ABC more. CFO, COO, Cxx, etc. have a new and higher base to judge their own pay. However, that trickle effect slows as it moves down latter and disappears all together at middle management and below.

Gordon

October 24, 2011 4:14 PM

All good points here. Another one I hope you will consider: it's entirely possible, not to mention likely that the majority of what's taught in MBA programs is complete B.S. (C-Level jobs for C students); bad psychology mixed with watered down statistics. What we call leadership or management is just a cult of personality (charisma). Management (depending on role) should serve the people in a company, or at least the shareholders, not the other way around.

Niklas

October 30, 2011 11:54 AM

We need to re-visit management as a term altogether. Management is an invention just like the tv. It has played out its role. Think coordination instead, which is exactly what good leaders do. Management entails control, which is detrimental to creativity and engagement.

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"The Wealth Debate" is a running discussion of wealth, poverty, the economy and income inequality in the U.S. and the world. It was started shortly after the Occupy Wall Street movement sparked a global protest about the fallout from the financial crisis and money in politics. You can reach the editors, Dan Beucke and Mark Gimein, by email, or follow BloombergNow on Twitter to keep up with posts.

Analyses or commentary in this blog are the views of the author and or commentators, and do not necessarily reflect the views of Bloomberg News.

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