Commentary: Why Some Compensation Is Clean Outta SightChristopher Farrell
The numbers are staggering. Actor Sylvester Stallone gets $20 million a movie, and baseball's Barry Bonds some $7 million a year. Walt Disney Co. Chief Executive Michael D. Eisner's total compensation was $10.6 million last year--and $203 million in 1993.
These astronomical sums contribute to one of the most wrenching trends in American society: widening income inequality. For instance, the average CEO now earns about 53 times as much as a factory worker, up from some 42 times in 1980. Today, more than 200 baseball players rake in at least $1 million a season. In 1980, only one did--Nolan Ryan. Stars are taking home outsize rewards not only when measured against workers. In every industry and profession, stars earn more money than ever compared with peers in their field.
MULTIPLIER. Why is talent today reaping so much more than a decade ago? The answer may lie in the impact of communication technologies operating in the global economy, which has vastly multiplied the rewards to talent and reputation. University of Chicago economist Sherwin Rosen calls it the "economics of superstars." Economists Robert H. Frank of Cornell University and Philip J. Cook of Duke University label this phenomenon "winner-take-all markets" in their book, The Winner-Take-All Society.
Here's the idea. It has always been the case that everyone would like to listen to the best singers and watch the best cinematic heroes. Similarly, in the high-stakes business world, every board of directors wants the fiercest, smartest, and best-regarded chief executive it can find. Indicted for murder? Hire the best lawyer. And so on.
What's different now is that markets keep getting bigger and bigger. In almost every industry, from entertainment to software to consulting, international business is growing in significance. Even mostly local businesses such as electric utilities compete on a larger national and international stage. Whoever gains star status--through skill or luck--has the leverage to get a big chunk of the action.
Many of today's superstars are going global. Eisner runs a worldwide media behemoth. Arnold Schwarzenegger's action films are hits in the U.S. and overseas. Barbra Streisand reaches millions through the global technologies of radio, records, television, and satellite hookups. Cable TV has transformed Johnnie L. Cochran Jr. from a local Los Angeles figure into the world's most prominent lawyer--fame that can only enhance his potential to earn big bucks. Their professions may differ, but the economics underlying their stratospheric paychecks is the same.
CAREER LOTTERY. The surge in celebrity income can be both bad and good. The lure of dollar signs can lead thousands of youngsters to squander their energy on what amounts to winning an occupational lottery, such as becoming a professional athlete or a movie actor. On the other hand, superstar incomes can propel economic growth. Look at the business heroes of the 1990s, such as Microsoft Corp.'s billionaire founder, William H. Gates III. Thanks to him and hundreds of other high-tech stars, hordes of enterprising people are starting their own companies and developing new technologies. Many of them will fail, but their entrepreneurial efforts are building the new information economy.
Today, global commerce is roaring ahead, as the developing world and the former East bloc embrace freer markets. Communications technologies are forging stronger links between nations and peoples. You had better get ready for even bigger star salaries tomorrow.