Who’s Worth More?
Do CEOs ‘earn’ their money as honestly as Hollywood actresses?

By Ken Shepherd
Business & Media Institute
Jan. 19, 2006

     CNN’s Andy Serwer fired the media’s latest salvo against American business with his January 19 swipe at corporate salaries. The Fortune magazine editor shut out defenders of corporate executives whom he hinted might be “getting paid for a pulse” while suggesting that a famous actress “earns” every penny she makes.

     “Julia Roberts makes a movie, she gets big bucks, more than $20 million-a-film,” Serwer opened his story quickly adding, “That’s okay, her movies usually earn many times that. You could say she makes money the old-fashioned way, she earns it. But,” asked the business contributor, “can the same be said for all those business executives who make millions? Are they really worth it?”

     Serwer then strung together some examples of what he considered excess, including former Disney CEO Michael Eisner’s $576 million-a-year salary and former General Electric chief Jack Welch’s company-furnished New York penthouse. But in praising a Hollywood star while slamming Wall Street ones, Serwer insulted his audience’s intelligence. As much as Julia Roberts is paid for her labor as an actress, she is also paid for being Julia Roberts: a Hollywood star who draws audiences, and with them, box office revenue by the millions.

     Any number of actresses could play the title role in “Erin Brockovich” and command a much lower salary than Roberts for the same amount of work – weeks of grueling long days of rehearsal and filming – but Roberts’s unique ability to rake in a large audience, and with it, profitability, is a significant part of how she “earns” every penny of her $20 million per movie.

     In the same way, any number of businessmen can attempt to run a multi-million-dollar enterprise like Disney or General Electric while commanding a significantly lower salary. But it’s the unique ability of an Eisner or a Welch in their respective industries to inspire confidence in consumers, shareholders, and employees that factors into paying those men significantly more than other job candidates.

     This common-sense principle is what economists refer to as economic rent, or “a measure of market power: the difference between what a factor of production is paid and how much it would need to be paid to remain in its current use.”

     But if Andy Serwer really doesn’t believe this principle works in the real world, I’d gladly be willing to take his gig on “American Morning” for half of whatever he’s paid.