Big Bonuses

December 21, 2006

It’s bonus time on Wall Street and the press is predictably horrified at the giant piles of money earned by executives. I’ve never understood why anyone, except for shareholders, could possibly care that Goldman’s chairman will get $53M. Certainly he deserves some credit for Goldman’s $9.5B in profits this year. Shareholders are getting a relative bargain: he’s only taking 0.5% of the profits. Conversely, hedge funds snatch 20% of all profits and a huge fee. And what about sports and movie stars who make huge amounts for appearing in a single film? In 2005, Will Ferrell earned about $40M. Ferrell earns about $20M per movie and his movies average $50M gross, so he takes nearly half the gross. That’s a far bigger slice than any CEO takes of gross income. Even if we eliminated all CEO bonuses, it would have no impact on the larger economic forces affecting average Americans. The truth is that populists use CEO paychecks to get dumb voters riled up. This tactic has been used successfully throughout history because most people can’t get past their jealousy and envy to understand how capitalism really works.

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