Friday, 13 July 2012

CEOs and Superstars

As part of an article about about bankers this morning The Buttonwood Columnist from The Economist purported that;

"The laws of supply and demand do not apply. When food producers compete to supply a supermarket, the retailer has the luxury of selecting the lowest bidder. But when it comes to investment banking, wages are very high even though the number of applicants is vastly greater than the number of posts. If the same was true of, say, hospital cleaning, wages would be slashed"

While it is easy to argue that the demand and supply pricing mechanism doesn't apply to bankers it doesn't mean that it is the correct argument. Rather then throwing these economic models out the window I am more inclined to explain this phenomena with them.

The CEO market is akin to a superstar market where there is a myriad of potential actors that will attempt to make the big screen, but only a select few will make it. What drives these actors to make the top is the massive payoff. In the banking world potential CEOs will work extremely long hours and put them selves through higher education to achieve CEO equivalent wages. Similarly, only a few will make it to these positions, hence the wage must compensate the potential candidates for the risk of not achieving the top job.

On the demand side an investment in a super star needs to generate blockbuster sales for it to be a viable business decision.  Just as Brad Pitt's talents aligned with, lets say, Inglorious Bastards, a CEO's skill set must align with the objectives of a specific bank for it to be a viable decision. The end result is an extremely exclusive labour market characterised by high demand, low supply and high wages that compensate both the CEO and yield a positive investment for the bank.

However, just like a movie a bank can either flop or be a success depending on what CEO is chosen. But, who is going to take the risk of not employing the best CEO or face loosing them to another bank because they were not offered enough.

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