Why your boss is overpaid

Because they’re worth that much to the company? Of course not.
Because they’ve earned it? Hah!
Because they at all deserve it in the slightest? Nope.

They’re paid that much to inspire you. So that you’ll work your ass off on the chance that one day, you, too, will be an obscenely overpaid executive.

At least according to Forbes anyway:

It is a typical “Dilbert” strip. The boss announces, “Our CEO has voluntarily slashed his pay from $6 million per year to $4 million. In a written statement, he said he wants to ‘share the pain.’ Do you feel better now?” A downtrodden intern replies, “I make my underpants from sandwich bags.”

But that’s office life, is it not? Bosses make obscene sums of money, while downtrodden cubicle slaves toil almost without reward. It might seem insane, but economists have a surprise for us: The insanity reflects nothing more than cool economic logic. There is method in the madness.

The ugly truth is that your boss is probably overpaid–and it’s for your benefit, not his. Why? It might be because he isn’t being paid for the work he does but, rather, to inspire you. In other words, we work our socks off in underpaying jobs in the hope that one day we’ll win the rat race and become overpaid fat cats ourselves. Economists call this “tournament theory.”

Lazear and Rozen’s tournament theory has stood the test of time and been supported by many subsequent pieces of empirical research. It also passes the smell test: The more grotesque your boss’s pay and the less he has to do to earn it, the bigger the motivation for you to work for a promotion. As Lazear wrote in his book, Personnel Economics for Managers, “The salary of the vice president acts not so much as motivation for the vice president as it does as motivation for the assistant vice presidents.”

Economists don’t even pretend that your boss deserves his salary. Suddenly, everything is clear.

Doesn’t that make you feel better now? An ExxonMobil executive gets paid $190,000 an hour not because he deserves it, but to give you something to work for – that one over infinity chance that you’ll go from working in a cubicle at Exxon to that top CEO spot.

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