MARCUS: How much is too much when it comes to compensation?

April 17, 2010

This month, as you watched the gallant Butler University basketball team uphold the honor of the Hoosier state, did you wonder about the compensation of college coaches and their future NBA stars? I wanted to focus on the game, but Cousin Candy Marcus was asking her usual question, “Now how much does that one get paid?”

She wanted to know about the compensation package for Coach K of Duke University and “that cute boy who coaches Butler.” She had heard that Coach Tom Crean of Indiana University made more than the IU president and was filled with wonder.

“Is it all ‘supply and demand’?” Cousin Candy asked, drawing on her vast knowledge of catch phrases.

“Yes,” I replied, determined to watch a key free throw and not to be drawn into a discourse on economic intricacies.

“But,” she continued, “basketball coaches are not all the same, not like tons of coal, not—as economists would say—‘homogeneous factors of production.’ They are different, one from the other, and the circumstances under which they will have to perform in their future jobs are likely to be dissimilar from those of their past positions. Aren’t the ‘information costs’ in such circumstances unknown and incalculable?”

“Yes,” I mumbled as an inbound pass by Duke turned into an easy layup.

“As I see it,” Candy proceeded, “the pay people get for their jobs is still a mystery despite two centuries of work by economists.”

“True,” I replied, after prying my teeth from my bleeding tongue.

“You economists like to teach that compensation is set by the value of the addition to output provided by the last worker added. How does that work in sports, or any part of the real world?” she said.

“It’s a concept,” I blurted as a timeout was called. “It’s a simplified way of understanding complex relationships involved in many diverse interactions.”

“But,” Candy insisted, “how does any employer know what the value of something will be? How does the board of a corporation know what added profit will be generated by a new CEO? How does the general manager of a football team know what a new running back will do for the team? Wouldn’t it be better to base pay on accomplishments rather than the uncertainties of expectations? And how does the boss separate out the contribution of an individual from that of the team?”

“Experience!” I cried in desperation.

Candy smiled and said quietly to emphasize my outburst, “Oh, I know all about experience; it’s what you gain from making mistakes.”

All was silent in the room except for the TV announcers and the crowd’s frenzy at Lucas Oil Stadium. Then Candy spoke softly, as to herself: “These are the central questions of our times. How much should teachers, doctors and politicians be paid and on what basis? What is appropriate compensation for executives compared to workers? What part of the revenue of a firm should go to the owners now as dividends and what part should be put aside for debt reduction, product or efficiency improvements, or societal concerns?”

“Let the market decide,” I whispered, exhausted by both the game and her incessant interruptive questions.

“Isn’t that the problem?” she asked. “We have stopped asking these questions and given the default answer that the market should decide. Isn’t that admitting we don’t have any standards or set of values? Letting the market decide means accepting a form of chaos, yielding to a quasi-religious belief in a mysterious supernatural power. Is that what you are saying?”

“Candy!” I lost control. “I’m not saying anything! I’m watching a basketball game! Let me do that in peace!”

But she would have the last word. “There won’t be any peace until we find a better way of determining who gets what in this world.”•


Marcus taught economics for more than 30 years at Indiana University and is the former director of IU’s Business Research Center. His column appears weekly. He can be reached at mmarcus@ibj.com.


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