What is Fair Pay for Executives? An Information Theoretic Analysis of Wage Distributions

http://www.mdpi.com/1099-4300/11/4/766

Venkat Venkatasubramanian email
Laboratory for Intelligent Process Systems, School of Chemical Engineering, Purdue University, West Lafayette, IN 47907, USA
Received: 31 August 2009 / Accepted: 26 October 2009 / Published: 3 November 2009
This article belongs to the special issue Maximum Entropy

Abstract: The high pay packages of U.S. CEOs have raised serious concerns about what would constitute a fair pay. Since the present economic models do not adequately address this fundamental question, we propose a new theory based on statistical mechanics and information theory. We use the principle of maximum entropy to show that the maximally fair pay distribution is lognormal under ideal conditions. This prediction is in agreement with observed data for the bottom 90%–95% of the working population. The theory estimates that the top 35 U.S. CEOs were overpaid by about 129 times their ideal salaries in 2008. We also provide an insight of entropy as a measure of fairness, which is maximized at equilibrium, in an economic system.