The Price of Everything - Eduardo Porter [57]
The reasoning fits smoothly with the income dynamics of pop stars. The music industry has been shaken by several technological disruptions since the 1980s. First MTV put music on television. Then Napster took it to the Internet. Apple allowed fans to buy single songs and take them with them. Each of these breakthroughs allowed the very top acts to reach a larger fan base, and thus take a bigger share of consumers’ music budget and attention. In 1982, the top 1 percent of pop stars took 26 percent of concert ticket revenue. By 2003 they were raking in 56 percent of the concert pie.
Superstar effects go a long way to explain the pay of Tom Cruise, which grew from $75,000 in Risky Business to somewhere between $75 million and $92 million for Mission: Impossible II. They apply to European soccer, where the top twenty teams reaped revenues of €3.9 billion in 2009, more than 25 percent of the combined revenues of all European soccer leagues. Brazil’s Pelé, the greatest soccer player of all time, made his World Cup debut in Sweden in 1958 when he was only seventeen. He became an instant star, coveted by every team on the planet. By 1960, his team, Santos, reportedly paid him $150,000 a year—about $1.1 million in today’s money. These days that would amount to middling pay. The top-paid player of the 2009-2010 season, Portuguese forward Cristiano Ronaldo, made €13 million playing for the Spanish team Real Madrid. Including sponsorships, the highest-earning player today is David Beckham, the brilliant English midfielder who made $33 million from endorsements in 2009, on top of $7 million in salary from the Los Angeles Galaxy and AC Milan.
Pelé was not held back by the quality of his game, but by his small revenue base. He might be the greatest of all time, but few people could pay to experience his greatness. In 1958 there were about 350,000 TV sets in Brazil, for a population of about 70 million. The first television satellite, Telstar I, wasn’t launched until July of 1962, too late for Pelé’s World Cup debut. By contrast, the 2010 FIFA World Cup in South Africa, in which Cristiano Ronaldo played for Portugal, was broadcast in more than two hundred countries. Adding up the audiences of each game around the world, tens of billions of pairs of eyes watched the tournament—more than the world population. Cristiano Ronaldo is not better then Pelé. He makes more money because his talent is broadcast to more people.
Rosen’s logic has been invoked to explain executive pay too. As American companies, banks, and mutual funds have grown in size, it has become crucial for them to put at the helm the “best” possible executive or banker or fund manager. This has set off an enormous competition in the market for managerial talent, pushing the prices of top executives way above the wages of anybody else. Xavier Gabaix and Augustin Landier of New York University published a study in 2006 estimating that the sixfold rise in the pay of chief executive officers in the United States between 1980 and 2003 was due entirely to the sixfold rise in the market size of large American companies.
The pattern follows the same Darwinian logic of elephant-seal sex. Elephant-seal cows consistently favor big bulls that can wallop rivals into submission. This happens despite the fact that the heavier they become the easier it is for sharks and orcas to eat them. Corporations deploy pay packages to attract talent as elephant seals deploy fat to attract mates. And yet humongous compensation plans are unlikely to produce benefits to shareholders. Fat paychecks have been found to encourage fraud—tempting executives loaded with stock options to do anything to increase the price of their companies’ shares. They have also been found to encourage excessive risk taking.
And it is doubtful that this strategy benefits society at large. Over the past fifteen years, the top 1 percent of American families raked in half the entire increase in the nation’s income. In 1980, they took home about a tenth of it. Today, they get to take home almost a quarter. That amounts to very