It is a rare thing on this column for me to cross someone like Kenneth Rogoff. Rogoff is a professor at Harvard University and once served as the chief economist at the International Monitary Fund so his opinion, particularly on matters of economics, carries a lot of weight. But Rogoff's most recent editorial in Al Jazeera isn't about economics, not really. Rogoff asks "why does the public accept sky-high salaries for sports superstars, but not for superstars of business and finance?"
Rogoff's argument goes on for about a page and a half but the meat of it boils down to these two paragraphs:
What amazes me is the public's blasé acceptance of the salaries of sports stars, compared with its low regard for superstars of business and finance. Half of all NBA players' annual salaries exceed $2m, more than five times the threshold for the top one per cent of household incomes in the United States. Because long-time superstars such as Kobe Bryant earn upwards of $25m a year, the average annual NBA salary is more than $5m. Indeed, Lin's salary, at $800,000, is the NBA's "minimum wage" for a second-season player. Presumably, Lin will soon be earning much more, and fans will applaud.
Yet many of these same fans would almost surely argue that CEOs of Fortune 500 companies, whose median compensation is around $10m, are ridiculously overpaid. If a star basketball player reacts a split-second faster than his competitors, no one has a problem with his earning more for every game than five factory workers do in a year. But if, say, a financial trader or a corporate executive is paid a fortune for being a shade faster than competitors, the public suspects that he or she is undeserving or, worse, a thief.
To be honest, I'm not sure where Rogoff went wrong. Either he doesn't understand how sports works or he doesn't understand how executive compensation works... or a little of both.
Let's start with the sports:
Jeremy Lin plays for the New York Knicks, which are a business and his compensation is determined, fairly directly, but what fortunes he brings the Knicks. If Lin's combination of ability, personality, and narrative draw fans to Knicks games, the Knicks make more money. If Lin helps the Knicks win games, the Knicks make more money. If Lin leads the Knicks to a championship, the Knicks make more money. If the Knicks are anything they are the players on the court and indeed, it is astonishingly difficult to find anyone in the New York Knicks franchise whose performance more directly impacts the organization's bottom line than the players. In light of that, paying Lin and his teammates a lot of money just makes good business sense and that's true for almost every professional grade player on almost every team in the NBA.
Without professional grade players you can't win games and draw fans and without victories and fans there are no profits. There aren't a great deal of people in the country who can play the game at Lin's level and his salary will reflect that over the course of his NBA career, provided that he keeps playing at his current level.
Because he NBA is paying for performance. While players may sign multi-year contracts, those contracts do come up for renegotiation. There is a reason you don't see a lot of old and used-up millionaire ball players warming the bench while pulling a seven figure salary; when the player stops preforming the team lets him go. If Jeremy Lin destroys a rotator cuff in practice next month and never manages to get his jump-shot back up to snuff he'll be lucky to stay on a professional team at all, much less enjoy superstar status and all those dreams of Jordan-like compensation will ricochet off the rim like a doomed three pointer from downtown.
Contrast that with how business works:
While great CEOs may lead their companies to new heights of profitability the indisputable fact remains that companies can and do continue to exist under poor and even destructive executive leadership, suggesting that, while the CEO contributes a great deal to the bottom line, he is neither the be-all nor end-all of company profitability. For every Apple and Microsoft with their superstar CEOs there are a dozen with uninspired executive leadership. Across the board, CEO pay is orders of magnitude greater than the average worker's despite the enormous contributions that even average employees can make to the bottom line.
Regardless of the social value of athletics, when athletes preform, their actions, like their pay, are in the moment. In contrast CEOs can and do intentionally cause companies to suffer in the long term to pad their own bank accounts, making decisions which they know to be against the best long-term interests of the company because their pay structure is centered around stock prices and quarterly performance. Perhaps the most glaring example of this was in 2008 financial crisis when major financial CEOs continually made reckless and dangerous bets knowing full well that a systemic collapse of the housing market was inevitable. Had any major trading house been willing to forgo short-term profits for long term gain and chosen cautious positions against the mortgage industry rather than doubling down in pursuit of massive quarterly growth, that company would have been in a most enviable position in the Fall of 2008. None did. For all the heaps of money piled upon the leadership of Lehman Brothers and AIG, for all the vast fortunes squandered upon the C-Level of Goldman Sachs it was the American taxpayer, not some brilliant financial strategy, that saved the banking industry.
Clearly then, business executives aren't paid based on the only performance metric that really matters: long term performance. Part of the problem is that a CEO's salary and indeed his entire compensation package is often set at his hire date. Even if an executive drives a successful company into the ground through inept management and foolish risk-taking, his eventual departure may cost his company staggering sums of money, even by NBA standards. Since the turn of the century, 21 American CEOs have walked away from their jobs and been paid in excess of $100,000,000 to do so -- not to work -- to quit. For the sake of comparison, if the average NBA player starts playing professionally at 21 and earns the average salary every year he would have to play professionally until the age of 71 to earn that much money. Jack Welsh, CEO of General Motors, walked away from his job in 2001 in exchange for a package worth $417,000,000 -- enough money to employ the entire Knicks roster for five-and-a-half-years.
So when Kenneth Rogoff asks why Americans tolerate large salaries for sports stars but not for CEOs the answer should be abundantly clear. With sports, the teams are getting what they're paying for. If an $8,000,000 point guard isn't doing his job he is replaced; if an $80,000,000 CEO wrecks an entire industry his board of directors has to pay several thousand times the average employee's yearly salary to replace him. Perhaps a more quotidian answer is that the average American looks at what Jeremy Lin does and says "I wish I could do that" but looks at what Richard Fuld, head of Lehman Brothers, did in 2008 and says "I could damn sure do at least as good a job as that guy for $22,,030,534 a year."