Does Julia Roberts want to Put a Ceiling on Pay?

An interesting survey shows that 30% of Americans say yes to the following question: "Do you think the government should limit the amount of money that companies NOT taking federal funds pay their executives?" Now admittedly over 60% said no, but still curious that a good number people think government should meddle in how people in private companies are paid.

This makes me wonder if others should have limits on how much they make. Consider the top stars of Hollywood for example. Routinely, stars like Denzel Washington, Jim Carey, Nicholas Cage, and Julia Roberts get what are called "first-dollar gross" deals where they get a percentage of every dollar of the movie's gross receipts. And this is guaranteed regardless of how well the movie does! For his role in "Meet Dave," Eddie Murphy earned a nice payday even though the movie lost nearly $70 million!). Now studios are "wising-up" and offerring only what are called "back-end" deals where the star gets a percentage only after the movie covers its costs.

This begs the question: "Why are studios so dumb for making these first-dollar deals?" To boil it down to basic Econ 101 -- it's the market. If a studio wants to have a big hit, they need to have mass appeal, thus the desire for a big headliner to help the draw. In addition, studios are relying more and more on international sales to drive their overall take--and these markets are even more dependent on known stars on the billing. Now add the supply component. Before the last year, so many movies were being made, top stars had options on the films they did. This further degraded the studio bargaining position.

Now it seems the supply and demand environment has changed. First, financing sources (usually from Wall Street) have dried up because of the financial crisis. This has caused studios to scale back on production, which has decreased the supply of movies for top actors to choose from. So now the studios have more leverage with these actors to get friedlier deals. Some actor agents lament that lucrative first-dollar deals may go the way of the dinasoar.

CEO salaries are too high on most objective measures -- and all subjective ones. Often critics of CEO pay point to the differential with other employees in the firm (e.g., they make 75 times of lower level employees); that differential is as great or greater in Hollywood as some stars make more than $30 million for one film (talk about bulging the gap between the and have-nots!). Yet, understanding the underlying market forces helps explain some of the behaviors.