Law of diminishing returns

I was reading an article on NYT about cap on executive pay and in recent past I have been having similar discussion with my friends.

I think the executive pays were becoming obscene and at times I do not find a logical reasoning to such high salaries other than will not find the right talent. I know of a lot of bright guys who work in government rather than private sector because they can make a larger difference. I know of bright folks who work with social sector rather than government/private sector because of the change they bring about to bottom of the pyramid. Similarly I think there will be a lot of right minds who will want to work in industries rather than financial services because the impact they make.

After all it is the mercenaries who want to make money in short term, who have ruined the manufacturing base in US. Do you really want a person who is after short term money to run your company ? Why not hire a consultant for that period to just fix the specific issue ?

The CEO job should be long term. When the CEO is responsible for quarter by quarter results, he lives the life of QonQ. There is only lip service about where the company should be in the next 10 years.

My opionion is that the base max salary of everyone should be capped at % of per-capita income of the country you are working in. (E.g. 50x of the per-capita income).

However that poses the challenge of how to reward folks who take risk. I have been arguing on lines that the bonus structure should not be changed but have an additional negative bonus. The bonus should be put into a 10 year escrow fund. On a yearly basis a person should be able to withdraw 10% of this current balance of this fund. Actually this fund can be part of the Social security/PPF scheme.

I was pleasantly surprised when I read that Prof. Raghuram Rajan had been suggesting the same solution. For those who do not know Prof. Rajan has been predicting the fall in the market for a long time. Mr. Rajan Was Unpopular (But Prescient) at Greenspan Party

We need to reward our brightest but by human nature everyone is greedy. This will make sure that the brightest do not kill the golden goose.

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