SYNOPSIS:

THE COST OF TALENT

How Executives and Professionals Are Paid and How It Affects America.

By Derek Bok.

342 pp. New York: The Free Press. $22.95.

In the early 1930’s, Babe Ruth was asked why he earned twice as much as Herbert Hoover did. “I had a better year,” he replied.

It’s a good story—even if it is, as some spoilsports would have it, apocryphal—but a startling one, from the perspective of the early 90’s: can you imagine the Sultan of Swat earning so little today? David Letterman, a funny man but no Babe Ruth, recently signed a contract guaranteeing him earnings more than 50 times those of Bill Clinton. Or, to take a more serious example from “The Cost of Talent,” in 1990 partnership in the white-shoe law firm of Cravath, Swaine & Moore brought an average yearly income of well over $1 million. The annual salary of a Supreme Court Justice is $164,100.

Derek Bok, a former president of Harvard University, has written a fascinating and courageous book that dares to suggest that there is something wrong with this kind of disparity. Until quite recently it was considered bad form—a reversion to the discredited politics of envy—to talk about the rapidly growing inequality of earnings in America. Now it has become acceptable to point out that some people have been doing much better than others. But the prevailing orthodoxy attributes the divergence of income distribution to a rising education premium, something that can be cured innocuously by providing better schools and retraining older workers. As Mr. Bok shows, however, any increase in the average payoff of education has been tiny compared with the huge disparities in earnings among the well educated. Mr. Bok documents the extraordinary differences in earnings growth among six professions that are or ought to be those of the best and brightest. At one end are chief executive officers of large companies, whose base salaries, doubled in real terms since 1972, are supplemented by increasingly generous stock options and other bonuses. At the other are top Federal officials, whose real earnings fell more than 25 percent over the same period. In between, medical specialists and Wall Street lawyers saw their compensation rise impressively, while college professors and schoolteachers were no better off in 1992 than they had been in 1972.

But don’t such trends simply reflect supply and demand? The most interesting part of “The Cost of Talent” is its series of case studies on the way compensation is determined in the six professions. The point in each case is that these are highly imperfect markets, in which the buyers have little clear idea either of the quality of the people they are hiring or of the benefit in getting the right man or woman. What is it worth to a large corporation to hire the 16th-best as opposed to the 17th-best potential C.E.O.? And is Smith No. 16 or No. 17? Nobody knows, so bargaining over compensation is a highly subjective process, easily manipulated by incumbents. Medicine and law are not that different, Mr. Bok points out: insiders can command large fees from clients who are too ill informed either to shop or to bargain effectively.

Meanwhile, he says, the earnings of people who work in the public sector—teachers and especially top Government officials—have been compressed by the misconceptions of poorly informed voters. In particular, the popular myth that the Federal bureaucracy is filled with the overpaid and the underworked seems unshaken by the reality that the civil service has become a startlingly unattractive career compared with opportunities in the private sector.

Why have these disparities widened so much since the 1970’s? On this question, “The Cost of Talent” is truly a breath of fresh air. The current fashion among those who want to sound sophisticated is to attribute all trends in the American economy to the relentless pressure of international competition. Mr. Bok sees no such inexorable force at work. In his view, what a professional is paid is largely a matter of subjective judgment, easily swayed by current prejudice. From the 1940’s to the 1970’s, professional earnings reflected the more or less egalitarian norms established in the New Deal and World War II.

In the Reagan era, those norms evaporated: greed was good, and high earnings were nothing to be ashamed of. Mr. Bok also draws attention to the powerful impact of a cult of leadership that attributes almost magical power to C.E.O.’s with star quality. On the other side, of course, the public sector and its “corrupt” employees are viewed as inherently undeserving. In other words, Mr. Bok attributes the widening gaps in pay not to outside forces but to a change in values and beliefs.

But does the pay differential between C.E.O.’s and professors do any real harm? It is in his evaluation of the effects of income inequality that Mr. Bok is on his shakiest ground. As I said, this is a courageous book: I am sure that Mr. Bok is well aware that he will be the subject of vitriolic attacks, some of which will doubtless dismiss “The Cost of Talent” as a sour-grapes complaint that businessmen earn too much compared with university presidents. More to the point, can we be sure that society would be better off if fewer of our most talented people went into business, law and medicine? For that is in effect what Mr. Bok is arguing. It is easy to make the case that too many smart people are engaged in looking for tax loopholes and that the erosion in the quality of our senior civil service is frightening. I am less comfortable with the argument that we would be better off with dumber captains of industry and smarter professors, and I wish Mr. Bok had laid out a better explanation of why he believes we would.

I also wish that some of his presentation had been a bit clearer. His early chapters contain fascinating information on the history of professional salaries, but the tables and charts are unnecessarily confusing. His discussion of the effects of changing supply and demand for skilled workers is a bit messy, making it unclear whether his rejection of conventional views is entirely justified. Finally, his remedies are less persuasive than his diagnosis. He reviews recent proposals, including President Clinton’s for a cap on the deductibility of executive pay. But other than progressive taxation, he mostly advocates a change in values—easy to wish for, but hard to turn into a policy proposal.

But never mind these quibbles. “The Cost of Talent” is an important book. Anyone who is seriously interested in where American society is headed should read it.

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