Good Monday, Kato Daily Podcast Listeners. This episode is for Monday, March 5th.

A recent Wall Street Journal op-ed by Cato Scholars Jagrage Gokley and Jerry Taylor argued that

the concept of executive overcompensation is a market myth

that has sadly been bolstered by President Bush's recent comments. Needless to say

they think capping salaries is a very bad idea. In today's episode

Jagadish explains why. Do companies overpay executives? It's difficult to say

without very specific information.

The public sees and the media picks up instances where companies,

CEOs have been paid huge amounts of money, even departing CEOs have been paid huge amounts, but the company's performance hasn't been stellar, and so they wonder why these CEOs are being paid such high amounts, and it appears as though they're being overcompensated.

But we don't actually get to see the projected company performance when they were hired.

We don't actually get to see what was built into the compensation structure of the CEO when he was hired.

For instance, if the CEO is really talented and has a huge market demand for his services,

he may have a huge high opportunity cost and he may need some

guarantees for showing up at a particular company than going somewhere else.

And those type of guarantees need to be built into compensation structures to attract really talented managers.

It's very similar to, for example, tennis players who are stars who get paid hundreds of thousands of dollars to just show up at a tournament, a second string

tournament, which they wouldn't ordinarily show up at, because they have other more lucrative

opportunities elsewhere.

So in order to pay these guys to show up, they have to be

guaranteed some amounts ahead of time. For very talented managers, it's probably the same

story. They need some guarantees. They're going to be assuming control of a company, taking

strategic decisions which are risky. They need to be hands-on. They need to be on the job 24-7

...