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Pay Grades

Determining excessive CEO compensation in a free market.

Ascertaining the sex of chickens early on can save money and boost profits in the poultry business. Why feed roosters when you want layers? Unfortunately, it’s difficult to tell male and female chicks apart. Hence the profession of chicken sexers, who use a variety of techniques — including one, which I won’t describe, derived from Japanese research in the 1930s — to sort the chicks out. It’s a tough job, it requires training and talent, not everyone can do it, and it adds value.

"Without a chicken sexer we won’t make it," you can hear a breeder saying. Followed by: "Without the best chicken sexer, we won’t be able to compete at all." And finally: "Tom’s the best chicken sexer. Pay Tom anything he wants."

How much should Tom make? In a free market, presumably, the sum would be determined by demand. But it’s not entirely clear how free our markets are these days. That brings us to the subject of compensation on Wall Street, which has been much in the news of late.

President Obama this month proposed a $500,000 salary cap for executives of bailed-out companies. This drew predictable howls in some quarters, though the proposal is rife with loopholes and the limit is, in any case, $100,000 more than the limit Missouri Senator Claire McCaskill had suggested — her rationale being that bailed-out CEOs shouldn’t make more than the president, who earns $400,000. Perhaps the president, who last summer deflected a question on when babies were entitled to human rights by saying that, theologically or scientifically, the answer was above his "pay grade," chose his salary cap number to leave room above him for economic answers as well.

More telling, perhaps, is the strange but unacknowledged overlap of interests in reformist Washington and on repentant Wall Street. On the one hand, President Obama is rightly appalled by the billions in compensation paid to employees of firms that lost tens of billions of dollars and needed government aid. The unfortunate symbol of this excess is erstwhile Merrill Lynch savior John Thain, who rushed out bonuses to staff in December — and gave new meaning to the phrase "tin-eared" by spending $1.2 million of the firm’s money to renovate his office. In the past these excesses were tolerated because firms like Merrill convinced themselves that, as with chicken sexer Tom, they absolutely had to have executives like Thain to survive and prosper.

On the other hand, the president appointed the tax-allergic Tim Geithner to be Treasury secretary and stood behind equally tax-challenged Tom Daschle to run the Department of Health and Human Services, until he stepped down. Only Geithner — no one else — could save the economy; only Daschle — no one else — could reform health care. The arguments sound oh-so-similar to those made to justify the now-decried out-of-control CEO pay. Even a chicken sexer couldn’t tell the difference.