It's a winner-take-all market - top money goes to top performing people or products

Washington Monthly, Dec, 1995 by Robert H. Frank, Philip J. Cook

The dependence of economic reward on performance ranking is nothing new--in any hierarchy, there's only room for one at the top, whether it be the head of a firm or an elected official. But a number of new winner-take-all markets have evolved in the last several decades. For example, it used to be that a sale-person was limited to a certain geographic area, an office was necessary to store certain documents, and traveling was done by car. Now, salespeople can travel greater distances faster and cheaper. They can interact with customers via fax and computer networks even more easily. And even the office is often no longer necessary; just a computer and a voice mailbox will do. The result is that more talented sellers capture an even larger share of the market, and others have less and less. Barriers that once prevented the top performers from serving broader markets are eroding. In the music industry, the driving force was the arrival of breathtakingly lifelike pre-recorded music. For salespeople, it's the technology of communication and travel. The result is much the same.

Much of the winner-take-all phenomenon is not about new markets but old ones in which the effect has intensified. It used to be that a variety of formal and informal rules traditionally prevented intense competition for talent in certain fields. For example, it was once the almost universal practice in American businesses to promote executives from within, which often enabled companies to retain top executives for less than one-tenth of today's salaries. As recently as 1984, the business community arched its collective eyebrow when Apple hired a new chief executive with a background in soft drink marketing.

But that tradition has slowly eroded. Today, business executives jump ship for a better offer as commonly as free agents in professional sports. When RJR Nabisco's Louis Gerstner left to head up IBM, or when Kodak brought in Motorola's George Fisher, no one was surprised. The most dramatic example of the explosion in pay at the top is Michael Eisner, who received $200 million in total compensation in 1993. The ratio between top executives and the average workers in their companies has now grown from 35-to-1 in the early seventies to more than 140-to-1 today.

To be sure, some aspects of the "winner-take-all" market do benefit consumers. If you're sick, you'll appreciate being able to consult with the very best doctor. We should also count as a benefit that the most talented executives are now more likely to manage the most important companies.

It's also the case that the companies that pay outlandish salaries are not necessarily behaving irrationally. Eisner was paid more than $200 million in 1993 not because he duped shareholders, but because he delivered an unprecedented increase in the company's value at a time when the mobility of chief executives has dramatically increased. It's not that this necessarily serves a broader social good, but it does make economic sense.

Yet the lure of the top prizes in winner-take-all markets has also steered many of the country's best and brightest toward career choices that make little sense for them as individuals, and still less sense for the nation as a whole. hi increasing numbers, top graduates from top colleges pursue positions in law, finance, consulting, and other overcrowded arenas. They're gunning to be the Johnnie Cochrans or the Michael Eisners of tomorrow, and in the process forsaking careers in engineering, civil service, teaching, and other occupations in which an infusion of additional talent would yield greater benefit to society.