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Tuesday, January 08, 2008

Dean Baker: Year of the Fat Cats

How well have stocks performed over the last ten years? Dean Baker says that as measured by the S&P 500, the real return has been roughly equivalent to the return on government bonds even though stocks carry more risk. He wonders why, in light of such low returns, CEO pay is so high:

Year of the fat cats, by Dean Baker: ...If we go back 10 years, we find that the ... average real return on [the S&P 500] ... has been 3.2%, a bit lower than the yield that was available on inflation-indexed government bonds 10 years ago.

This is rather striking. It is unlikely that many people invested in stock for the sort of return that is typically associated with government bonds, which are much less risky. At least for the last decade, stockholders have not been rewarded for taking this risk.

This brings us to the topic of CEO pay. We saw an explosion in CEO pay that began in the 1980s and has continued into the current decade. ...

This explosion of pay at the top was justified by many economists based on the returns that they produced for shareholders. The argument was that even these incredibly high salaries still were just a small fraction of the value that the CEOs generated, so their pay was money well spent. These exorbitant salaries gave the CEOs the necessary incentive to produce extraordinary returns.

While this argument may never have been terribly compelling..., it clearly is not true today. The typical CEO is not producing great returns for shareholders..., [but] the CEOs still seem to get extraordinary pay packages. ...

    Posted by on Tuesday, January 8, 2008 at 02:24 AM in Economics | Permalink  TrackBack (0)  Comments (59)


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