Yesterday’s posting raises the question “if an executive can’t do a good job for $2 million/year, will he do a good job when paid $20 million/year?” The moribund U.S. economy seems to suggest that paying out huge sums to managers is not effective. The Israel Essay questions whether our current economic slump may not be due to the fact that companies can’t afford to invest profits in technology and equipment because they’ve paid out all of their profits to senior managers. Today we’ll try to figure out if, even if cash were free, it is a smart idea to make corporate managers as rich as Rockefellers.
Suppose that you owned a small company and had a money tree in the back yard. You can now pay your managers as much as you want without reducing profits. Should you advertise for a CEO at $75 million/year? On the plus side this is more than most American CEOs earn (see http://www.forbes.com/ceos) and therefore you should be able to recruit someone good. On the minus side, however, think about how focussed on work you’d be if someone handed you a $75 million check tomorrow. You’d probably move into a bigger apartment and redecorate. And wouldn’t it be nice to have a few vacation houses? You know that you’ll be traveling by private jet from now on, but to which of the 50 fractional jet ownership plans should you subscribe? You’re going to get invited to a lot of fun charity events so you’ll need a new wardrobe. In short, living like a rich person is very time-consuming.
Getting back to the owner’s perspective… perhaps an investment would be best managed by a comfortably well-off manager, rich enough to afford a new car that won’t break down and be a distraction from her duties but not rich enough that she spends several days per week shopping for private islands.
Has this experiment been done? Absolutely. Consider the Harry Potter books. As our friend Jin says, it is a mistake to compare Harry Potter to Shakespeare: “Harry Potter is a fictional character; J.K. Rowling is the modern equivalent of Shakespeare.” Unlike the Bard, however, J.K. Rowling was not perennially short of funds. Let’s look at her productivity:
- 1997: Harry Potter and the Philosopher’s Stone published; the American rights are eventually worth enough that Rowling can quit her day job (teaching high school)
- 1998: Harry Potter and the Chamber of Secrets published
- 1999: Harry Potter and the Prisoner of Azkaban published; all three books are on the New York Times bestseller list.
- 2000: Harry Potter and the Goblet of Fire published, movie rights to first book sold; Rowling ascends to the “movie rich” class of authors.
- 2003: Harry Potter, Book 5 completed. Thanks to merchandising, Rowling is now richer than the Queen of England.
One year per book while Rowling’s financial condition ranged from struggling to sort-of rich. Three years per book after Rowling became rich enough to buy castles, private jets, etc.