Harry Potter and the $100 million/year manager

Yesterday’s posting raises the question “if an executive can’t do a good job for $2 million/year, will he do a good job when paid $20 million/year?”  The moribund U.S. economy seems to suggest that paying out huge sums to managers is not effective.  The Israel Essay questions whether our current economic slump may not be due to the fact that companies can’t afford to invest profits in technology and equipment because they’ve paid out all of their profits to senior managers.  Today we’ll try to figure out if, even if cash were free, it is a smart idea to make corporate managers as rich as Rockefellers.


Suppose that you owned a small company and had a money tree in the back yard.  You can now pay your managers as much as you want without reducing profits.  Should you advertise for a CEO at $75 million/year?  On the plus side this is more than most American CEOs earn (see http://www.forbes.com/ceos) and therefore you should be able to recruit someone good.  On the minus side, however, think about how focussed on work you’d be if someone handed you a $75 million check tomorrow.  You’d probably move into a bigger apartment and redecorate.  And wouldn’t it be nice to have a few vacation houses?  You know that you’ll be traveling by private jet from now on, but to which of the 50 fractional jet ownership plans should you subscribe?  You’re going to get invited to a lot of fun charity events so you’ll need a new wardrobe.  In short, living like a rich person is very time-consuming.


Getting back to the owner’s perspective…  perhaps an investment would be best managed by a comfortably well-off manager, rich enough to afford a new car that won’t break down and be a distraction from her duties but not rich enough that she spends several days per week shopping for private islands.


Has this experiment been done?  Absolutely.  Consider the Harry Potter books.  As our friend Jin says, it is a mistake to compare Harry Potter to Shakespeare:  “Harry Potter is a fictional character; J.K. Rowling is the modern equivalent of Shakespeare.”  Unlike the Bard, however, J.K. Rowling was not perennially short of funds.  Let’s look at her productivity:



  • 1997:  Harry Potter and the Philosopher’s Stone published; the American rights are eventually worth enough that Rowling can quit her day job (teaching high school)
  • 1998: Harry Potter and the Chamber of Secrets published
  • 1999: Harry Potter and the Prisoner of Azkaban published; all three books are on the New York Times bestseller list.
  • 2000:  Harry Potter and the Goblet of Fire published, movie rights to first book sold; Rowling ascends to the “movie rich” class of authors.
  • 2003: Harry Potter, Book 5 completed.  Thanks to merchandising, Rowling is now richer than the Queen of England.

One year per book while Rowling’s financial condition ranged from struggling to sort-of rich.  Three years per book after Rowling became rich enough to buy castles, private jets, etc.

15 Comments

  1. c8to

    April 28, 2003 @ 11:22 am

    1

    correlation isnt causation…

    the slowdown might be becuause she is running out of rehashed childrens ideas to sell to an undiscerning audience…

  2. fozbaca

    April 28, 2003 @ 11:32 am

    2

    One problem with the Harry Potter comaprison. Rowling finished writing the 7th book and final book of the series before the first movie was released. They have not been published which probably has more todo with harry Potter becoming an industry unto itself where all product releases are heavily timed to mazimise profits.

  3. Bill Brown

    April 28, 2003 @ 11:42 am

    3

    The first three books came out of nowhere and I’d wager that she probably wasn’t fabulously rich until the Harry Potter phenomenon caught the public’s imagination.

    Her fourth book probably didn’t earn her most of her fortune except insofar as it spurred sales of the first three books. I doubt many people bought just the fourth one when it came out.

  4. Guy H.

    April 28, 2003 @ 11:48 am

    4

    Just a quick note: the first book is titled “Harry Potter and the Sorcerer’s Stone”

  5. Colin Whittaker

    April 28, 2003 @ 11:52 am

    5

    Only in the US was it the Sorcerer’s Stone, the rest of the world could cope with Philosopher which the US publishers felt would put off readers.

  6. Jefferson Provost

    April 28, 2003 @ 12:23 pm

    6

    One data point does not a sample make. I don’t think the same analysis would hold up for, say, Stephen King: Vastly wealthy ($200 million net worth), yet continuing to write prolifically throughout his career.

  7. Bill Brown

    April 28, 2003 @ 1:14 pm

    7

    Colin: in the UK, the title is “Harry Potter and the Philosopher’s Stone”

    source: SFFWorld.com

  8. ojsbuddy

    April 28, 2003 @ 2:17 pm

    8

    QUESTION : What question ! ? !

    So how do you like blogging so far , Dr Phil ?

    I still think the buzzard suit is a better use of your talents .

  9. Fazal Majid

    April 28, 2003 @ 2:21 pm

    9

    No matter what one may think of the literary merits of the Harry Potter series, J. K. Rowling earned her wealth by entertaining millions of children and grown-ups alike.

    Compare this with the richest man in the UK, the Duke of Westminster, or the Queen of England, who inherited a fortune made mostly of property looted by their ancestors, or public coffers in the case of the Queen (since the UK has never had a very profound revolution, there was little land redistribution. A stunning proportion of housing in London is built on property rented for 99 years from feudal landlords rather than bought outright).

  10. MikeB

    April 28, 2003 @ 2:24 pm

    10

    The theory that Rowling has written all the books in advance and is only releasing them slowly to maximize profits is entertaining, but I don’t think it’s correct. For one thing, according to http://www.fool.com/news/take/2003/mft/mft03021101.htm the release schedule is so slow that Scholastic is losing money. We can be pretty sure that Rowling has outlined the seven plots in advance (as many good writers do) but she’s writing the actual books one at a time. I know I’ve read interviews with Rowling that confirm this, but I can’t find one to link to right now, because I have a day job.

  11. Dimitri.

    April 28, 2003 @ 7:55 pm

    11

    I think it is obvious that Rowling’s productivity has gone way down since she is rich. Whose wouldn’t? This fact is so well known that most wages are designed in such a way that you never can become rich off them – but more like Philip said, have a decent car, house, etc, but not rich enough to be able to say “listen lads, I’ve been thinking, why don’t you take this software and finish it yourselves, because I’m gonna be in Hawaii the next three months. Just so you know”.

    The whole western society is structured in such a way, not only the salaries. The work moral, the short vacations (it’s not that they couldn’t survive if you left for three months, but you might get the taste of freedom) and so on.

    The point here is that all this applies to the “slave caste”. That is, mostly, people who work. The managers are not part of that caste, so they can get the huge salaries.

  12. Ted Marcus

    April 28, 2003 @ 11:27 pm

    12

    I think you’re making an erroneous assumption that CEOs and incestuous corporate board members are just like normal people in their motivation. This assumption is incorrect because these people, who occupy the apex of Corporate Feudalism, apparently regard themselves as a different species from the serfs and peasants. Because they are Nobility, they have a divine entitlement to lavish compensation, secure pensions, guaranteed health care, and everything else life has to offer.

    It doesn’t matter how they “perform,” what “motivates” them, or whether it makes sense to invest so much in senior managers. By entitlement, they are immune to the normal laws of economics. They are entitled to their compensation and perks even if they drive their company into ruin. If one is forced out even due to incompetence or malfeasance (like Donald Carty, the former CEO of American Airlines), he is guaranteed a generous severance package as a matter of entitlement. Another company’s incestuous board members will surely snap him up, and pay him an even more lavish compensation package, just because he’s entitled to it by divine right as a member of the Nobility.

    In terms of “performance motivation,” it doesn’t matter whether a member of the Nobility gets a compensation package of $2 million or $75 million. The Nobility seems to be motivated only by vying for prestige among their peers. The $75 million CEO enjoys more status at the country club (and among the Wall Street analysts who are the real “customers” of all corporations), and in doing so helps to set a standard that continually raises the bar for the other aristocrats. After all, the success of a corporation depends solely upon attracting the most powerful and prestigious CEO who can raise the stock value. And to get the best and brightest requires a commensurate compensation package, lest some other company gain that irreplaceable talent. If giving a cherished CEO a “retention bonus” requires the company to lay off thousands of workers, it’s no problem at all. They’re expendable. Let them eat cake.

    I suspect that Carty has no more comprehension of why he was forced out than George H.W. Bush has of how a draft-dodging, gay-loving Ultra-Liberal hick from Arkansas managed to usurp the second term in the White House to which he was Absolutely Entitled by divine right. Carty and his executive team surely thought there was absolutely nothing wrong or incongruous about awarding themselves bonuses and bankruptcy-proof pensions while insisting that the employees bear all the sacrifice. That’s just “the way things ought to be.” After all, they are irreplaceable, unlike their filthy little employees.

    Carty probably regarded withholding disclosure of the bonuses and pensions until after the union elections as nothing more than the sort of routine “information management” that CEOs do all the time for the Wall Street analysts. I wouldn’t be surprised if he is outraged at the “liberal press” for having shed a completely unwarranted light on perfectly fine and normal behavior. Carty exemplifies the sort of “ethical standards” to be found in American executive suites. As does the Bush Administration that they bought and paid for, which looks to be the smartest investment they ever made.

    Finally, I don’t think it’s fair to compare J.K. Rowling with the Corporate Nobility. Regardless of what you think of the Harry Potter books, she has earned her wealth purely through her own creative effort. She has produced something that delights large numbers of people enough to entice them to give her large amounts of money for it (that may explain her “slowdown,” since success and expectation surely imposes a heavy burden on further creativity). Can you say anything like that about the Donald Cartys, who are little more than arrogant sleazy politicians with a gift for slinging taurine excrement and churning paper wealth?

  13. Igor

    April 28, 2003 @ 11:54 pm

    13

    If I’m not mistaken, J.K. Rowling got married and had a baby (both between 2001 and 2003) – which may account for about a year. On the other hand, I’ve heard she also bought a castle
    during this time – and that may account for another year -).

  14. Sam

    April 29, 2003 @ 3:31 pm

    14

    I had a prof. once who posited that there are dangers to corporate managers being too poor: they may more easily be tempted to stick their fingers in the cookie jar and they may not have sufficient independence or security to take risks. I think many entrepreneurs do better their second or third time around in part because they’ve developed a small stake that gives them a bit more leverage to stand their ground when negotiating with the money people who often control the company. So maybe a bit of wealth for the managers is not a bad thing?

  15. Ken Keller

    May 1, 2003 @ 4:58 am

    15

    http://cbc.ca/programs/sites/hottype_rowlingcomplete.html

    This is the transcript of an interview with Ms. Rowling. I saved the file last July but I can’t remember when the interview was conducted. I believe it was from spring 2002. The train they refer to is the Hogwart’s Express (I think) and the interview was conducted on a train ride.

    To the point… she claims that a primary reason for not doing interviews is that she is too busy writing.

    It’s an interesting interview and she’s a charming and interesting woman. I haven’t read any of her books though, perhaps I’m too old.

    p.s. To cover another’s point, one of the problem with grand payment schemes for managers is that it causes them to believe they are owners and capitalists. Not bearing any of the responsibility that owners bear (remember, stock options are usually fixed and are used more for the purposes of tax evasion than motivation), they can fixate on what generates personal profits. Gouging your own company requires less imagination than most things and better suits the temperaments and capabilities of some managers. Finally, there are fewer negative implications attached.

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