"I could argue under the same statement that such a move would do plenty for the company in establishing itself as a very good place to work making it likely to attract and retain top talent. "
Market value means that your turnover should already be low, your employees can't leave for better paying jobs. Obviously there is more to retainment than just wages, there is managerial competency and how you treat people. Bad workplaces have to pay more than market to retain people, good workplaces shouldn't.
But again, it's a silly argument that paying substantially more than market is going to benefit shareholders in some obtuse way. There are as many disadvantages as advantages, such building a complacent, insular underperforming culture just like that Etsy appears to have.
And another is using excess comp to build a "cult of personality" so the CEO can be worshipped, and those are terrible for business/shareholders.
"It could also make individuals 'hand crafting' items to sell, who are more likely to be a conscientious lot, feel good about continuing to do business with Etsy. These factors could lead to a more solid niche in the market, longer company survival, and more consistent profits over time.
I'm not saying that's what I believe but let's assume it is true."
Do you really think those people are going to leave Etsy because it no longer has the CEO's cult cheerleader squad decorating the offices?
"Since long term profit projections get hazy, the safer bet almost always is to follow a short term profit argument and take surer profits as soon as possible even though, in perfect hindsight, a long term approach would have yielded greater overall profits."
Do you really think Etsy's massive admin spending, far higher than similar companies, is really translating into long term value and higher profits? This is money not spent on partners or customers or brand, but internally.
"I'd bet this happens a lot and this idea that everything is subservient to profits paradoxically hurts value more than it helps."
The easiest response is to ask you to read some Warren Buffett. All his shareholder letters are free to read going back to the 1970s on Berkshirehathway.com. Long term value in a business is created by building a unique and defensible product offering, a brand, a technology, etc.
It's not from throwing more employee parties and increasing employee compensation. Employees can walk out the door at any time, even the CEO. One of Warren's favorite quotes is you want a business any fool can run, because sooner or later a fool will be running it.
In Etsy's case, it needs to be the best source/destination for it's unique crafts. To do that it needs to provide a viable market place to it's partners. Otherwise it's entire business will just dissipate to Amazon and Ebay and the Kum ba yah nirvana will disappear anyways.
Paying engineers $200k a year when they would be content if they made $150k a year is simply wasting $50k each on something that doesn't add value to the business. That excess comp would be far better spent hiring more people to build more and better competitive advantages, or marketing campaigns to get more partners and better build Etsy's brand, or kept in the bank to safeguard against rainy days, or returned to the shareholders as dividends and better support the value of it's stock.