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Can someone explain to me why we're outraged that CEOs make lots of money? I truly don't understand it. My presumption is that CEOs are adding enough value to

by mod 11y ago

Can someone explain to me why we're outraged that CEOs make lots of money? I truly don't understand it. My presumption is that CEOs are adding enough value to be worth their pay, just like every other worker (should be).

nick-parker 11y ago
You shouldn't be outraged, but your justification for their pay is a little simplified. People aren't paid based on the value they create, strictly speaking. They're paid whatever is necessary to get them to work. The value of a good executive is, I'd argue, far higher than their pay reflects. A truly bad executive can put a company on the path to ruin, and a decent executive making bad choices can do the same. What companies are paying for in good/great executives isn't some N times multiplier on that salary in new income, they're paying for reduced chances of catastrophe. The supply of good/great executives is small, and the potential loss from putting a dunce in charge of AAPL/GOOG is obscene, so is it any wonder the price lands where it does?
deleted 11y ago
[deleted]
rlongstaff 11y ago
Who decides that and is it true or fair? If the CEO earns 25x the average employee salary would it be clear that they add 25x more value to the company than any other employee?
- jsprogrammer 11y ago
  I'd say no. Salary is more a function of negotiating ability than value added. Consider this, does your salary fluctuate regularly as your performance waxes and wanes? Or does it stay relatively constant with occasional steps up?
- sambe 11y ago
  The owners of the company? i.e. Shareholders. It's not anyone else's business. Workers are free to renegotiate their contract, resign, buy shares, or start their own company. Who else other than the owners should decide?
  - ThomPete 11y ago
    That would be true if they success of the company was 100% depending on the companies ability alone, however it's not. There are many factors external to the company itself that are involved in creating successful companies.
    - sambe 11y ago
      That isn't relevant. The company has owners, and owners get to decide what to do with their property. If they decide most of the success was due to external factors then they can change their compensation appropriately. Evidently they do not agree with you on average.
      - ThomPete 11y ago
        It's relevant in a bigger context which is the one I am raising. Feel free to isolate it to a more narrow one if you would rather debate that. Personally I find that trivial but each to their own of course. Property rights if you really want to go there is not a natural right but something that is guaranteed by the state.
  - kristopolous 11y ago
    Let me show you how close to feudalism this idea is: Serfs are free to renegotiate their constitution, move, buy land from their king, or start their own kingdom. Now all these options sound a little more silly... Because we accept the power structure of feudalism. But many doubt there is any power structure in capitalism. Landless wage labourers? Yes. Debt based economies? Yes. Taxes given as handouts to the owners? Yes. The differences between the structure of two are far more subtle than most people like to believe. We are at a point on political democracy, that's great - but economically we are still kinda stuck in the 1700s ... We could try to democratize that too. Part of the problem is that neoliberalism suggests that everyone should act like an entrepreneur, a CEO if you will. This is actually as silly as implying that if everyone acted like a prince or princess in feudalism, it would have been a fair system. But you point to the "self made man". Statistically speaking, those are about as rare as someone marrying into royalty in classical feudalism. Pointing to that fact of course, didn't make feudalism fair either. There's a real, leaky (they all are), power structure imposed by the system that can't be undone by the power of magical thinking.
zajd 11y ago
Honestly CEO's getting paid a ton isn't really much of a problem as opposed to the US's absurdly low income tax rates for the wealthy. Not to mention capital gains... estate taxes... etc
- brandonmenc 11y ago
  > US's absurdly low income tax rates for the wealthy The top 20% of earners pay over 80% of the income taxes. That's low?
  - pvnick 11y ago
    As long as there are rich people there will be folks complaining that the rich don't pay enough taxes.
    - zajd 11y ago
      Well honestly the concentration of wealth that we see today is a new thing in society. Pretty sure the only time you're going to find the type of inequality you see today is going back to feudal times. And honestly, I doubt it would even be as bad as it is today.
    - ch4s3 11y ago
      Not really. You don't read news and magazine articles from the 50s 60s and 70s decrying the contribution of the wealthy to the common good. You see people complaining about the taxation of the wealthy during periods of high income inequality. You see the same thing in other countries as well. Presently we tax wages heavily for middle income levels and tax capital gains at a much much lower rate. People are pissed that the wealthy, wielding their outsized political influence have pulled up the ladder of opportunity behind themselves.
  - zajd 11y ago
    Yawn, what percentage of total income in the US is earned by the top 20%?
_delirium 11y ago
There's a lot of suspicion that your presumption isn't accurate. It's a fairly big area of research, though. One alternate hypothesis is a form of "executive capture", that companies nominally owned by shareholders are actually run by more of a clique of executives, who serve on each others' boards and pay each other large salaries. Some mild but inconclusive correlational evidence for that view is that when controlling for other factors (size, industry, etc.), CEOs are paid less at private companies and companies with concentrated ownership, than at companies with diffuse ownership—suggesting that when the owner is in charge and paying attention, they prefer to rein in executive pay.
- paulhauggis 11y ago
  "There's a lot of suspicion that your presumption isn't accurate" If this is the case, the only people that should be worried about it are the shareholders and the other people that own the company. If I was running a company and I had more money to spare (because I couldn't pay the CEO past a certain amount of money), I'm not just going to pay a worker because it sounds nice. Workers should be paid based on market value and the value they bring to the company.
  - dbcfd 11y ago
    > If this is the case, the only people that should be worried about it are the shareholders and the other people that own the company. And the SEC is responsible for improving company/shareholder relationships, so this falls under their directorate.
- yuhong 11y ago
  I wonder why non voting stock is not more commonly used.
toephu2 11y ago
That is a very naive presumption..although if the CEO is the founder of the company, then I don't have any qualms about it.
- saalweachter 11y ago
  Aesthetically, I'd prefer to see a founder-rewards paid out through stock (eg, dividends) rather than through salary. That maintains the distinction between "rewards for early investment" and "wages for on-going labors".
pvnick 11y ago
The populist (read: uninformed/envious) belief is that high-paid CEOs are simply entitled ladder climbers that don't provide any more value than the mail room clerk, and yet soak up zillions in bonus dollars that should instead go towards paying said mail room clerk.
- jogjayr 11y ago
  > paying said mail room clerk. Or paying dividends/buybacks to shareholders? This isn't just an issue for the "99%"
- dbcfd 11y ago
  Except for studies that indicate otherwise. And that their salary is determined by a board of their peers, whose salaries are determined by boards that may include that executive. There is no downside to increasing CEO compensation for these boards.
rrss1122 11y ago
Because someone told us we should be outraged at income inequality.
untog 11y ago
Because the level of CEO pay compared to average employee pay is at all time highs. It's gone from 20x the average employee in 1965 to 295x in 2013. Do you think CEOs are 10x more effective than they were in the 60s? http://www.epi.org/publication/ceo-pay-continues-to-rise/ http://www.epi.org/publication/ceo-pay-continues-to-rise/ And yes, you can easily counter saying that private companies are allowed to pay their CEOs whatever they want, which is absolutely true, but at the same time many people are growing concerned about a wealth gap in the US - that the rich are getting subtantially richer, while the middle class haven't seen meaningful gains in a long time. That absolutely has an impact on society as a whole.
- drauh 11y ago
  Even without referring to wealth inequality, "capitalism" is supposed to be a sort of "economic meritocracy", i.e. those who get a lot of money did so by their abilities. (I hesitate to use the word "work".) Or, at least, that's what I understand modern capitalists to say. The crucial thing here is the stagnation of the middle class. There is no way 1 CEO can produce the output of 300 employees. Is it socialist to expect that the people who actually make the stuff to share in the gains? Or maybe that's communist.
  - true_religion 11y ago
    I don't know about, and probably can't defend the idea that CEOs can produce outsized benefits compared to rank-and-file employees. However a poor CEO can easily waste more money than 300 salaries just by choosing the wrong product direction, or keeping a strategy going long after its not beneficial. So perhaps pay is so high just to find a CEO whom isn't a bad hire.
    - jogjayr 11y ago
      > So perhaps pay is so high just to find a CEO whom isn't a bad hire. There's some theories that posit that high CEO pay isn't to reward the CEO for their work directly but to motivate everyone under the CEO to work their ass off in hopes of one day becoming the CEO. Motivating the workforce in this manner makes the company sufficiently more productive as to make it worth paying those high salaries; even if the CEO doesn't actually produce anything themselves. I believe it's called a tournament-style system or something. It's pretty bleak-sounding.
realcoolguy 11y ago
This is not always the case (some CEOs don't understand the company they're on-boarding with). However I'm never outraged by it, if a company wants to provide a massive salary, have a massive failure, then send off the CEO with a golden parachute more power to them. However I may want to re-evaluate my future relationships with a company who is not very careful with their large investments. As for the rules, it seems to be somewhere between class-warfare and fairness. Not sure we really need to know, but it might be useful information for some investors. It doesn't affect me so I have a hard time forming a strong opinion on this.
ThomPete 11y ago
IMO it's actually the wrong way to look at it. The position as a CEO is potentially adding value if managed properly, but many CEOs get insane salaries, bonuses and golden handshakes even when they perform poorly. The actual groundwork that made most companies valuable were laid much earlier in the organizations life.
savanaly 11y ago
Also, how do we define worth their pay?
jogjayr 11y ago
Not outraged about CEOs making lots of money compared to their workers, necessarily. I think this is a good idea for shareholders and as a shareholder I support it. Why would giving shareholders more insight into such a major expense (compensation) be a bad idea? I'd want to know if a company I was a shareholder in was over/underpaying its CEO, because there's some efficiencies to be gained there.
deleted 11y ago
[deleted]

by mod 11y ago

nick-parker 11y ago

You shouldn't be outraged, but your justification for their pay is a little simplified. People aren't paid based on the value they create, strictly speaking. They're paid whatever is necessary to get them to work. The value of a good executive is, I'd argue, far higher than their pay reflects. A truly bad executive can put a company on the path to ruin, and a decent executive making bad choices can do the same. What companies are paying for in good/great executives isn't some N times multiplier on that salary in new income, they're paying for reduced chances of catastrophe. The supply of good/great executives is small, and the potential loss from putting a dunce in charge of AAPL/GOOG is obscene, so is it any wonder the price lands where it does?

deleted 11y ago

[deleted]

rlongstaff 11y ago

Who decides that and is it true or fair? If the CEO earns 25x the average employee salary would it be clear that they add 25x more value to the company than any other employee?

jsprogrammer 11y ago
I'd say no. Salary is more a function of negotiating ability than value added. Consider this, does your salary fluctuate regularly as your performance waxes and wanes? Or does it stay relatively constant with occasional steps up?
sambe 11y ago
The owners of the company? i.e. Shareholders. It's not anyone else's business. Workers are free to renegotiate their contract, resign, buy shares, or start their own company. Who else other than the owners should decide?
- ThomPete 11y ago
  That would be true if they success of the company was 100% depending on the companies ability alone, however it's not. There are many factors external to the company itself that are involved in creating successful companies.
  - sambe 11y ago
    That isn't relevant. The company has owners, and owners get to decide what to do with their property. If they decide most of the success was due to external factors then they can change their compensation appropriately. Evidently they do not agree with you on average.
    - ThomPete 11y ago
      It's relevant in a bigger context which is the one I am raising. Feel free to isolate it to a more narrow one if you would rather debate that. Personally I find that trivial but each to their own of course. Property rights if you really want to go there is not a natural right but something that is guaranteed by the state.
- kristopolous 11y ago
  Let me show you how close to feudalism this idea is: Serfs are free to renegotiate their constitution, move, buy land from their king, or start their own kingdom. Now all these options sound a little more silly... Because we accept the power structure of feudalism. But many doubt there is any power structure in capitalism. Landless wage labourers? Yes. Debt based economies? Yes. Taxes given as handouts to the owners? Yes. The differences between the structure of two are far more subtle than most people like to believe. We are at a point on political democracy, that's great - but economically we are still kinda stuck in the 1700s ... We could try to democratize that too. Part of the problem is that neoliberalism suggests that everyone should act like an entrepreneur, a CEO if you will. This is actually as silly as implying that if everyone acted like a prince or princess in feudalism, it would have been a fair system. But you point to the "self made man". Statistically speaking, those are about as rare as someone marrying into royalty in classical feudalism. Pointing to that fact of course, didn't make feudalism fair either. There's a real, leaky (they all are), power structure imposed by the system that can't be undone by the power of magical thinking.

zajd 11y ago

Honestly CEO's getting paid a ton isn't really much of a problem as opposed to the US's absurdly low income tax rates for the wealthy. Not to mention capital gains... estate taxes... etc

brandonmenc 11y ago
> US's absurdly low income tax rates for the wealthy The top 20% of earners pay over 80% of the income taxes. That's low?
- pvnick 11y ago
  As long as there are rich people there will be folks complaining that the rich don't pay enough taxes.
  - zajd 11y ago
    Well honestly the concentration of wealth that we see today is a new thing in society. Pretty sure the only time you're going to find the type of inequality you see today is going back to feudal times. And honestly, I doubt it would even be as bad as it is today.
  - ch4s3 11y ago
    Not really. You don't read news and magazine articles from the 50s 60s and 70s decrying the contribution of the wealthy to the common good. You see people complaining about the taxation of the wealthy during periods of high income inequality. You see the same thing in other countries as well. Presently we tax wages heavily for middle income levels and tax capital gains at a much much lower rate. People are pissed that the wealthy, wielding their outsized political influence have pulled up the ladder of opportunity behind themselves.
- zajd 11y ago
  Yawn, what percentage of total income in the US is earned by the top 20%?

_delirium 11y ago

There's a lot of suspicion that your presumption isn't accurate. It's a fairly big area of research, though. One alternate hypothesis is a form of "executive capture", that companies nominally owned by shareholders are actually run by more of a clique of executives, who serve on each others' boards and pay each other large salaries. Some mild but inconclusive correlational evidence for that view is that when controlling for other factors (size, industry, etc.), CEOs are paid less at private companies and companies with concentrated ownership, than at companies with diffuse ownership—suggesting that when the owner is in charge and paying attention, they prefer to rein in executive pay.

paulhauggis 11y ago
"There's a lot of suspicion that your presumption isn't accurate" If this is the case, the only people that should be worried about it are the shareholders and the other people that own the company. If I was running a company and I had more money to spare (because I couldn't pay the CEO past a certain amount of money), I'm not just going to pay a worker because it sounds nice. Workers should be paid based on market value and the value they bring to the company.
- dbcfd 11y ago
  > If this is the case, the only people that should be worried about it are the shareholders and the other people that own the company. And the SEC is responsible for improving company/shareholder relationships, so this falls under their directorate.
yuhong 11y ago
I wonder why non voting stock is not more commonly used.

toephu2 11y ago

That is a very naive presumption..although if the CEO is the founder of the company, then I don't have any qualms about it.

saalweachter 11y ago
Aesthetically, I'd prefer to see a founder-rewards paid out through stock (eg, dividends) rather than through salary. That maintains the distinction between "rewards for early investment" and "wages for on-going labors".

pvnick 11y ago

The populist (read: uninformed/envious) belief is that high-paid CEOs are simply entitled ladder climbers that don't provide any more value than the mail room clerk, and yet soak up zillions in bonus dollars that should instead go towards paying said mail room clerk.

jogjayr 11y ago
> paying said mail room clerk. Or paying dividends/buybacks to shareholders? This isn't just an issue for the "99%"
dbcfd 11y ago
Except for studies that indicate otherwise. And that their salary is determined by a board of their peers, whose salaries are determined by boards that may include that executive. There is no downside to increasing CEO compensation for these boards.

rrss1122 11y ago

Because someone told us we should be outraged at income inequality.

untog 11y ago

Because the level of CEO pay compared to average employee pay is at all time highs. It's gone from 20x the average employee in 1965 to 295x in 2013. Do you think CEOs are 10x more effective than they were in the 60s? http://www.epi.org/publication/ceo-pay-continues-to-rise/ http://www.epi.org/publication/ceo-pay-continues-to-rise/ And yes, you can easily counter saying that private companies are allowed to pay their CEOs whatever they want, which is absolutely true, but at the same time many people are growing concerned about a wealth gap in the US - that the rich are getting subtantially richer, while the middle class haven't seen meaningful gains in a long time. That absolutely has an impact on society as a whole.

drauh 11y ago
Even without referring to wealth inequality, "capitalism" is supposed to be a sort of "economic meritocracy", i.e. those who get a lot of money did so by their abilities. (I hesitate to use the word "work".) Or, at least, that's what I understand modern capitalists to say. The crucial thing here is the stagnation of the middle class. There is no way 1 CEO can produce the output of 300 employees. Is it socialist to expect that the people who actually make the stuff to share in the gains? Or maybe that's communist.
- true_religion 11y ago
  I don't know about, and probably can't defend the idea that CEOs can produce outsized benefits compared to rank-and-file employees. However a poor CEO can easily waste more money than 300 salaries just by choosing the wrong product direction, or keeping a strategy going long after its not beneficial. So perhaps pay is so high just to find a CEO whom isn't a bad hire.
  - jogjayr 11y ago
    > So perhaps pay is so high just to find a CEO whom isn't a bad hire. There's some theories that posit that high CEO pay isn't to reward the CEO for their work directly but to motivate everyone under the CEO to work their ass off in hopes of one day becoming the CEO. Motivating the workforce in this manner makes the company sufficiently more productive as to make it worth paying those high salaries; even if the CEO doesn't actually produce anything themselves. I believe it's called a tournament-style system or something. It's pretty bleak-sounding.

realcoolguy 11y ago

This is not always the case (some CEOs don't understand the company they're on-boarding with). However I'm never outraged by it, if a company wants to provide a massive salary, have a massive failure, then send off the CEO with a golden parachute more power to them. However I may want to re-evaluate my future relationships with a company who is not very careful with their large investments. As for the rules, it seems to be somewhere between class-warfare and fairness. Not sure we really need to know, but it might be useful information for some investors. It doesn't affect me so I have a hard time forming a strong opinion on this.

ThomPete 11y ago

IMO it's actually the wrong way to look at it. The position as a CEO is potentially adding value if managed properly, but many CEOs get insane salaries, bonuses and golden handshakes even when they perform poorly. The actual groundwork that made most companies valuable were laid much earlier in the organizations life.

savanaly 11y ago

Also, how do we define worth their pay?

jogjayr 11y ago

Not outraged about CEOs making lots of money compared to their workers, necessarily. I think this is a good idea for shareholders and as a shareholder I support it. Why would giving shareholders more insight into such a major expense (compensation) be a bad idea? I'd want to know if a company I was a shareholder in was over/underpaying its CEO, because there's some efficiencies to be gained there.

deleted 11y ago

[deleted]