Friday, December 14, 2007
Fighting for a Chance
Very interesting insight about why revealed talent get high rewards. Successful CEOs are paid enormities, and that is because the cost of trying them out is so high. I copy from Marginal blog: Top bosses and film stars get multi-million pound salaries because talent is scarce. Everyone knows this. Which is a shame, because it's bullshit. Talent is initially unknown, and can only be revealed by working with expensive equipment. So, for example, we can only find out if a manager is any good if he's in charge of a big venture, or if an actor has box office appeal if he's in a mega-costly film. It is, therefore, very expensive to learn who's got talent and who hasn't. What's more, people with talent cannot offer to share this cost with employers, either because of lack of cash or risk aversion: people don't pay for the chance to become bosses or film stars. In these conditions, what's scarce isn't talent, but revealed talent. There might be loads of people with the ability to be film stars or bosses, but only a handful get the chance to show what they can do. Marg Helgenberger gets big money not (just) because she's a better, more popular or more beautiful actress than others, but because she's a proven quantity. This has three consequences:
1. The industry employs lots of tried mediocrities - people just above the threshold of acceptable competence. Employers prefer these to untried but potentially better workers because the risk of a single failure - the box office flop of a $100m film, or the failure of a large company - far exceeds the possible benefit of finding lots of people a little better than the barely competent.
2. Output is inefficiently low, and prices high. This follows from the industry being staffed by the barely competent rather than the brilliant.
3. People who have proved that they are genuinely brilliant earn huge salaries as economic rent. Superstar salaries have risen not because talent has become scarcer, but because it's become harder to reveal talent. The highest paid actress today is Nicole Kidman, see pic.