“CEOs make too much and they exploit the common worker.”
This is a refrain I hear with surprising regularity at college. When pressed, many claim it seems impossible that one person could produce something of so much value, while others do not.
However, many of the voices that decry income inequality see nothing wrong with preferring Charli D’Amelio, Kanye West, or Andrew Sullivan’s content. Consuming celebrity content tends to promote the very income inequality they think should be impossible. Fortunately, these entertainers can teach us something about how the ‘superstar’ effect works with, well, superstars.
The superstar effect is when an individual gets a disproportionate share of the gains from what seems like small differences in ability. In the digital age, more of the economy has converted to winner-take-all situations because the marginal costs of producing an additional unit of a good are small, and the fixed cost associated with getting started is high. If two products cost the same, but one is better, people are almost always going to choose the superior product. Since there is not a clear limit to the supply of the superior product, only the best services are frequented, and wealth is distributed disproportionately to the especially talented.
Some may suggest we resist the income distribution that comes from superstar firms. In effect, this means choosing inferior goods over superior goods. If it costs ten dollars to see a movie, I’d prefer to watch a good one. Resisting the superstar effect may result in having a society of worse. As a general rule, people prefer having the best option for a given price and prefer better products. In effect, resisting a more unequal distribution means choosing worse stuff.
Charli D’Amelio is the among the most famous of the TikTokers. She started posting dance videos in 2019 and has leveraged her 100 million followers to obtain sponsorships, and create a podcast and a makeup line that has moved her net worth to $20 million dollars. The popularity she has attained has resulted in a considerable windfall.
One can imagine that D’Amelio may not have been as popular had she gotten involved later in TikTok, or that she exploits the employees of TikTok by sharing a disproportionate share of the platform’s gains. In a sense, these arguments against her wealth boil down to the premise, “you didn’t make that.” Still, the revealed preferences of those who prefer to purchase her products signifies that she creates something extraordinary. If it was as simple to create value as detractors claim, it seems odd that others would not be in similar positions.
Kanye West is another example. As a rapper, he was known for his creativity and artfulness and is one of the best of all time. His net worth is around $1.8 billion dollars, which is fueled in large part by his Yeezy brand. The value of the brand in turn, builds on the status associated with his music. There are scores musicians, some who probably have lyrics almost as good as Kanye’s. However, few consumers want to pay for second best, and the cost of producing another ‘Homecoming’ download is infinitesimal. The small differences in a winner-take-all environment matter.
Journalism is dying has become another standard refrain. A better refrain might be that journalism is becoming customizable. Instead of having to pay for a New York Times subscription, I can choose to read only the authors I see as insightful. The creation of Substack has made it so that institutions are less able to gatekeep authors people want to read, and it allows readers to avoid paying for the chaff. The beneficiaries of the customizability of journalism are those who produce content people are interested in. Andrew Sullivan is an example. After leaving New York Magazine for expressing an unpopular opinion, Sullivan quadrupled his income and can be paid closer to the value he creates, while maintaining editorial control.
This trend of people being paid significant sums for the value they create is no different in the business world, but it seems significantly less flashy. Tyler Cowen estimates that the skillsets of CEOs allow them to capture between 68 and 73 percent of the value they bring to firms compared to an estimate that workers are paid approximately 85% of their marginal product on average. The value they create is harder to visualize than the output of celebrities, but it illustrates the same concept.
READER COMMENTS
Phil H
Feb 1 2022 at 1:31pm
I’m not quite convinced by this.
In the case of superstar entertainers, the public perceives very directly the quality of their output. I feel like I can (have to!) trust the judgment of consumers, because they are the only ones who know what they like.
On the other hand, CEOs don’t have to justify their existence to consumers. They just have to convince small numbers of people on boards. The quality of their work is not instantly obvious to the public (stock trading creates some transparency, but not quite to the same level). And we seem to hear a lot of stories of CEOs whose companies do objectively badly and yet continue to receive large paypackets. They also seem to have a lot of revolving doors. Even when they leave one company they find a sinecure at another.
So it’s hard to see CEOs as like Kanye.
Isadore J
Feb 1 2022 at 2:27pm
I think you’ve got a good point that the public perceives the quality of their output more than perhaps CEOs, and in a sense, public entertainers contributions are more visible.
On the other hand, I’m not as convinced by your second claim about how CEOs don’t have to justify themselves to consumers. There have been successful campaigns to oust CEOs before. Perhaps its a slightly different standard, but I think the point that CEO pay can deserve to be large is still there, especially if they’re getting paid similar to celebrities in other domains.
Finally, I wanted to respond to your claim about CEOs who receive money despite doing a bad job, and that to some degree there is a revolving door of CEOs. I don’t disagree with you that there are some CEOs who do a bad job, and are paid significantly more than they are worth. However, I’m not sure that phenomena is unique to CEO pay. We’ve seen plenty of first-round draft picks get paid very well in sports, and end up underwhelming. I’d also add that there may be pragmatic reasons to provide a golden parachute to a CEO so as to get rid of them more easily if they are incompetent. I’m not really sure about the revolving door point, because I’ve also seen it happen a little bit.
Jon Murphy
Feb 1 2022 at 3:08pm
I’m not sure why you’re unconvinced. You’re making the same point: CEOs’ contribution is harder to observe, so they are able to capture less of their marginal product of labor compared to others whose contributions are clearer.
Mark Z
Feb 1 2022 at 3:45pm
I’d contend that there’s every bit as much room for arbitrariness and obscurity in the value produced in a song or movie as in whatever a CEO produces. Maybe a millionaire pop star was herself interchangeable with thousands of others, but she had a brilliant sound technician or songwriter that made her break out single stand out a bit, establishing the name recognition on which she built her career thereafter? Maybe most of the value really was contributed by those anonymous support staff not even making six figures? I don’t think it’s any clearer, intuitively, that star performers contribute as much value to their own finished product as they reap from it than it is that CEOs do.
robc
Feb 1 2022 at 4:17pm
Lets use athletes instead of entertainers. While a Michael Jordan may be clear cut talent to everybody, for most athletes it is the matter of convincing a small board (coach, GM, team President, maybe some scouts) that you are talented. The difference between making millions and working at a moving company is pretty small. And sometimes that board makes mistakes. It is those mistakes that make Moneyball possible. But the lack of Oakland A’s world series titles makes it pretty clear that most of the value is reasonably captured properly.
I see no reason to suspect that the boards picking CEOs would be any worse.
Phil H
Feb 2 2022 at 12:58pm
Thanks, those are some good responses. On the comparisons with singers, I think you’re slightly missing the wood for the trees. Put me in a room with anyone who’s sold records or played professional sport, and the difference is very obvious. They can sing; I can’t. They can ball; I can’t. I agree that the differences between singers who are megastars and singers who aren’t can be a bit slippery and arbitrary. But they all seem to be clearly talented people.
With business leaders, that difference is less obvious to my eye. I’ve been in rooms with business leaders, and they seemed mainly just like the people around them.
Moreover, the mechanisms by which you can obtain money in business without creating value are well known: being a glib talker who generates unmerited confidence; the old boys network; inherited money; agreeableness; etc. It’s just not obvious to me that that noise doesn’t swamp the signal of business competence. (It’s not obvious that it does swamp the signal either; I don’t think we know the answer to this question.)
Mark Brophy
Feb 1 2022 at 6:05pm
The CEOs aren’t exploiting the employees, they’re exploiting the shareholders. They’re highly paid even when their performance is poor.
Maniel
Feb 1 2022 at 6:13pm
“CEOs make too much and they exploit the common worker.”
Here’s a thought for college students who want things to be decided for them by the “fairness gods:” show some initiative. For the time being at least, we live in a relatively free country where we have the opportunity to make the most of what we have. If you’re in college, you have a lot. Choose to be an uncommon worker: master your job, be the least common worker you can be, and make your company, or school, or store better than it was. Then, with the skills and ideas you have acquired, start your own company. Go public and become a CEO.
Easy to say of course, but many have done it. Yes, the road is littered with those who didn’t quite make it, but as it happens, the competition is more intense than might appear.
Kevin
Feb 1 2022 at 9:36pm
In addition, people on the left often like to make the claim that CEOs are eating up the productivity gains that ought to be going to rank-and-file employees, while ignoring the fact that a CEO like Jamie Dimon, who makes something like $34.5 million a year, could distribute his gains to the more than 255,000 employees at JP Morgan Chase, and each would gain something like $135 and almost 11 cents each per year. Similar accusations plague companies like Disney. The result is the same. If CEOs worked for free, there would be little left over for other employees, who presumably are paid market rate.
Maybe shareholders are being shortchanged by CEOs by eating up profits?
Not totally related, but it is often also suggested that wages are not keeping up with productivity increases, while total compensation is ignored. https://www.americanactionforum.org/research/does-compensation-lag-behind-productivity/
I feel like this point can’t be made often enough, as more and more ‘shade’ is thrown on capitalism for ‘failing’ our society.
robc
Feb 2 2022 at 12:12pm
Maybe. But my calculation is that Dimon’s salary is just over 1 cent per share. For a company that has an EPS of $15.36.
So, maybe it is worth it?
Kevin
Feb 2 2022 at 3:44pm
That makes sense to me.
vince
Feb 3 2022 at 2:43pm
Great topic. Especially relevant with so much focus on income inequality and the Progressive movement. Owners of firms (shareholders) should be allowed to pay whatever they want. As several said, Boards determine CEO pay. The real question is whether the Boards are acting in the interest of shareholders.
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