Darwinian Logic of Management Pay

Graef Crystal’s article on CEO compensation (“CEOs and Incentives: The Myth of ‘Pay for Performance,’ ” Jan. 8) spoke of two justifications for criteria based on pay for performance:

* To create a personal incentive for managers to do better on behalf of stockholders.

* To provide “revenge” satisfaction for stockholders if a manager fails.

Missing from Mr. Crystal’s logic is any attention to the fundamental underpinnings of free enterprise, especially the Darwinian concept of competition. This has been a flaw in nearly all discussions of CEO compensation.

Let’s get down to fundamentals.

If CEOs are well paid, this should serve as an attraction to bright new minds, drawing talent in, either from the next generation or from other walks of life. If the market for managers were truly free, this influx of fresh talent should grow until compensation levels stabilize, and even begin to drop. So long as our brightest see it as desirable to be managers, this rule should apply.

That this has not happened is devastating evidence for what we have known all along: The market for managerial talent is anything but free and competitive. If compensation packages remain astronomically high for longer than a decade or so, it means supply and demand is simply not operating at the level of the managerial class. There is no logical escape from this indictment.

Traditionally, market distortions occur when beneficiaries of the distortion succeed in putting barriers in the path of new competitors. Often this is justified by proclaiming a natural aristocracy of some sort. In this case, the aristocracy is a coterie of “genius managers” who, of course, could never be replaced by a bunch of neo-wanna-bes. No moral umbrage is called for. It’s human nature, after all. This trend, however, is devastating to free enterprise over the long term.

Pay for performance may not directly affect company success, but it offers the only clear-cut tracking of competence presently available. Though crude, it serves as a flag to say, “Get this entrenched, inept blockhead out of here!” Mr. Crystal should put this useful feature at the top of his list.

The entire justification for capitalism rests on the idea of a true market of managerial talent, in which the best rise (no matter how sparse their family connections) and the incompetent fall away (no matter who they play golf with). Finding ways to restore and enhance the open competitiveness of this market should be the chief focus of our economic philosophers.

DAVID BRIN

Encinitas