Wednesday, November 18, 2009

Fairness

CEO's make a lot of money. Really, it's understandable--the top dog should get paid the highest wage. Top management decisions are very important to the proper functioning of a company and I'm sure the job of a CEO is very time consuming and high pressure.

But is it really fair that a CEO makes more than 100 times the salary of the lowest paid employee? Are they really working THAT much harder; are they really worth THAT much more?

Free market economists would probably say sure. The free market (as free as it is) values them that highly, so that must be what they're worth.

This paper argues differently. Using thermodynamics as a base and equating fairness with entropy, it estimates a CEO is worth about 8 to 16 times what the least valuable employee is, and so should be paid accordingly.

It's nice to know the outrage so many have expressed at the magnitude of CEO pay packages is based on sound principles of fairness. It's also really cool fairness in an economic system can be expressed mathematically.

No comments:

Post a Comment