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Imagine a company doing $10 billion in yearly revenue. If the right guy manages the joint, it will do $11 billion. Are you willing to pay 10 million a year for

by gizi 11y ago

Imagine a company doing $10 billion in yearly revenue. If the right guy manages the joint, it will do $11 billion. Are you willing to pay 10 million a year for this person? What if another company in similar circumstances offers 20 million? And another company 50 million? In the end, they all have 1 billion at stake. So, they all could even offer more and still be laughing all the way to the bank. In other words, even if a CEO could only make a difference of 10% on a large company's revenues, it would still be worth it to pay him incredibly large amounts of money. Apple paying Steve Jobs $50 billion would still have been a very cheap bargain. He made a difference of way more than that.

AlexB138 11y ago
The studies sited in the article directly contradict your statement, unless I'm misunderstanding what you're trying to say.
pitay 11y ago
The same could be said for any other employees. Programmers, warehouse workers or whatever. Maybe they could be paid for the difference they make too. Yet this doesn't happen, because the supply side is important as well, as well as the lack of power these people have. From what I see, finding the right guy to manage a company is very hit and miss in the real world. Just look at Ron Johnson. He was previously senior vice president of retail operations at Apple, and then hired as CEO of J.C. Penny. He was fired as CEO from J.C. Penny in 2013, after retail sales were down by 32% and stock prices fell steeply. This was despite him having a very successful tenure at Apple. The pricing should factor in the uncertainty and risk of the performance of someone in the position of CEO. I have probably have not touched most of things that could be issues here, such as corruption, and that some CEOs are just extremely incompetent. I remember a CEO that was given 250 million dollars to leave because he had that much negative impact on the company he was running. This was someone that the board thought was a great hire. Anyway, I find the post I am replying to is way too simplistic and looks at CEOs with extremely rose coloured glasses. There is a lot more to consider.
- blfr 11y ago
  The same could be said for any other employees. Programmers, warehouse workers or whatever. Some programmers, maybe, but very few could move large company's revenue by 10%. And almost certainly no one moving physical stuff around in a warehouse could.
  - falcolas 11y ago
    > no one moving physical stuff around in a warehouse could [move large company's revenue by 10%] Sure they could. They're the feet on the ground, so to say, and so they have the best insight into inefficiencies which are occurring on a day-to-day basis. You can bet it wasn't a CEO who discovered UPS' "only make right turns" trick. Or Bezos who optimized Amazon's warehouses. A 10% reduction in costs is very realistic for these kinds of finds, and those reduction in costs are worth more than a 10% increase in revenue.
  - pitay 11y ago
    I was referring to the amount of money the employee makes for the company. Does the employee get near what they make the company? I doubt it. Does the company need to pay the employee near what they make the company? No. So a company does not need to pay the CEO the difference that they supposedly make the company. They just need to pay what someone will accept to do a similar job (I am not saying worse in any way), just like other employees.
- yummyfajitas 11y ago
  The same could be said for any other employees. Programmers, warehouse workers or whatever. Maybe they could be paid for the difference they make too. Yet this doesn't happen, because the supply side is important as well, as well as the lack of power these people have. No, this can't be said for every other employee. The best warehouse worker is not adding $1B or anything close to it to the bottom line. It can be said for some programmers and these programmers do tend to make lots of money. (Though in many cases they are given titles other than "programmer", e.g. "managing director" of a team of 0.) See also top traders - at many firms they can make more than the CEO. The fact that not all CEOs are perfect doesn't contradict this claim. In fact, if you are attributing JC Penny's 32% loss to the CEO you are supporting the claim of gizi.
freddref 11y ago
There's a lot of pretty big "if"s in this comment. Good example of the line of thinking discussed in the article.
jib 11y ago
This is an argument that a lot of people make in a lot of business cases. It is not a correct argument. Find huge amount. Say "if only X%" (usually 1% or something else low) then increase of 1%*huge amount which is still a huge amount! Somehow the argument of "if only X%" is meant to avoid the need to prove that you can, in fact, do X%. 1% of extra revenue is hard. 1% time save across the board is hard. If you claim 1%, you better have some strong arguments as to how you can achieve 1%, not do "handwavy do something with synergy or extra information - even if we just get 1% which is a low number, 1% of something huge is still huge. We think we can do more than 1%!". It is almost as pervasive as hindsight arguments that ignore risk costs. "I put all my money on black at the roulette table and my business is up 100% in the last year - I will bring huge wins to you".
- jacquesm 11y ago
  It is a partially correct argument. If you apply a method to something small and it has an x% effect then your compensation will always be limited by that upside. Applying that same method (or knowledge) to a larger entity potentially has a larger upside and so your room for negotiation expands. Whether or not the difference in percentage is the same is of course debatable but if there is an upside in both cases then the upside is likely to be larger in absolute terms when applied to the larger company. And so those large companies will be able to pay higher compensation for the same skill levels. That's not at all the same as playing roulette and it does not mean this argument is not correct. It's correct in principle, you may want to argue about the degree to which it transfers from smaller companies to larger companies.
  - marcosdumay 11y ago
    No, it's not valid. It failed to address the fact that it may not even be possible to increase anything. What if revenue is limited by the product? Then it's not the CEO that can impact it. What if the odds of ever changing anything fall as the company grows? Then there's no scale gain for the CEO's work. There's a huge number of problems that may impede that scenario, and the argument just distracts people away from those.
paulsutter 11y ago
Do you have a methodology for determining the revenue impact attributable directly to the CEO? Something that doesn't involve insta-cloning all the other employees and customers for A/B tests.
- TheOtherHobbes 11y ago
  You have a good point, but it's clear that CEOs do have a huge effect on company fortunes. When you get a rockstar CEO, the upside is obvious. And when you get an idiot CEO, so is the downside. Kind of. One problem is that Wall St isn't great at distinguishing between idiot CEOs who sweat companies in the short term but kill them in the long term, M&A shopaholic and management-by-rebrand CEOs who flap around doing a lot of useless stuff with no actual clue, rock stars who grow companies with a vision, and bullshit CEOs who churn through investor cash and wishful thinking but create no real profitability.
  - doppelganger27 11y ago
    The issue of distinguishing high-quality execs from low-quality ones is one of the points mentioned in the Jacquart & Armstrong paper that I think the article was referencing[1]. 1. http://knowledge.wharton.upenn.edu/wp-content/uploads/2014/02/Armstrong-paper1.pdf http://knowledge.wharton.upenn.edu/wp-content/uploads/2014/0...
RobertoG 11y ago
I think that if it was my business, I would prefer to hire a good CEO, instead of a star, and use the rest of the money to hire one hundred talented CEO assistants with different expertises. Sounds like a better investment.
- vlehto 11y ago
  Lets assume that CEO can fuck up so bad that it will bancrupt a company. Star CEO has 0,1% chance of fuck up/year. Good CEO has 0,2% chance. And completely mediocre would be about 0,4%. Hire three mediocre dudes to CEO the company so that they are always deciding on everything together. You have now 0,064% yearly chance of bancrupty, while you can easily pay them just 300k each. It seems like high CEO pay is often a result of CEO holding the company as hostage. Not not necessarily conciously, but from shareowners point of view. Distribute the risk of bad moves and you should get OK performance cheaply.
  - RobertoG 11y ago
    So, more expertise and more hands make the task riskier? Too many cooks spoil the broth, but a good cook with a hundred scullions can make a lot of good food and investigate a lot of recipes.
    - vlehto 11y ago
      CEO is just a human. With about 16 wake hours per day. When company get's big enough, the role of CEO gets more and more about enabling the employees to create value. Consistency is valuable on it's own right. And it increases as company gets bigger. Companies typically have board to put a degree of democracy in the big moves. So that mistakes get unlikely as 10 people are not very likely to do the same mistake at the same time. But they are not part of day to day operations, so they usually suffer from lack of data.
anon4 11y ago
You can get the exact same increase in profits by investing 10 million a year in a talented group of developers and having them produce mobile games. Or a fleet of truck drivers. Or anything, really. 10mil/yr is enough to finance a small enterprise, so you can realistically branch out into anything that makes money.
andrewclunn 11y ago
Well yeah, if I just make up numbers and imagine a world where a single CEO would have the same impact on multiple companies. Of course that's not reality at all, well unless the increase in revenue comes from political connections that supply legislation that favors your business of course.
restalis 11y ago
Imagine a company doing $12 billion in yearly revenue. If "the right guy" manages the joint, it will do $11 billion. Are you willing to pay 10 million a year for this person?
lmm 11y ago
If a given CEO really is 10% better than the guy who'd do it for $49 million less, then sure, he's a bargain. But is there any evidence that he's actually 10% better?
Mikeb85 11y ago
Yet most CEOs don't increase performance to that degree. Steve Jobs was a founder, not an MBA placed on the job.
dikdik 11y ago
Upping the revenue from 10B dollars to 11B relies on the infrastructure, capital, corporate relationships, etc, etc that were previously built by a company. The new CEO didn't just create 1B of additional wealth out of thin air, he was provided a lot of expensive tools to carry out his vision.

by gizi 11y ago

AlexB138 11y ago

The studies sited in the article directly contradict your statement, unless I'm misunderstanding what you're trying to say.

pitay 11y ago

The same could be said for any other employees. Programmers, warehouse workers or whatever. Maybe they could be paid for the difference they make too. Yet this doesn't happen, because the supply side is important as well, as well as the lack of power these people have. From what I see, finding the right guy to manage a company is very hit and miss in the real world. Just look at Ron Johnson. He was previously senior vice president of retail operations at Apple, and then hired as CEO of J.C. Penny. He was fired as CEO from J.C. Penny in 2013, after retail sales were down by 32% and stock prices fell steeply. This was despite him having a very successful tenure at Apple. The pricing should factor in the uncertainty and risk of the performance of someone in the position of CEO. I have probably have not touched most of things that could be issues here, such as corruption, and that some CEOs are just extremely incompetent. I remember a CEO that was given 250 million dollars to leave because he had that much negative impact on the company he was running. This was someone that the board thought was a great hire. Anyway, I find the post I am replying to is way too simplistic and looks at CEOs with extremely rose coloured glasses. There is a lot more to consider.

blfr 11y ago
The same could be said for any other employees. Programmers, warehouse workers or whatever. Some programmers, maybe, but very few could move large company's revenue by 10%. And almost certainly no one moving physical stuff around in a warehouse could.
- falcolas 11y ago
  > no one moving physical stuff around in a warehouse could [move large company's revenue by 10%] Sure they could. They're the feet on the ground, so to say, and so they have the best insight into inefficiencies which are occurring on a day-to-day basis. You can bet it wasn't a CEO who discovered UPS' "only make right turns" trick. Or Bezos who optimized Amazon's warehouses. A 10% reduction in costs is very realistic for these kinds of finds, and those reduction in costs are worth more than a 10% increase in revenue.
- pitay 11y ago
  I was referring to the amount of money the employee makes for the company. Does the employee get near what they make the company? I doubt it. Does the company need to pay the employee near what they make the company? No. So a company does not need to pay the CEO the difference that they supposedly make the company. They just need to pay what someone will accept to do a similar job (I am not saying worse in any way), just like other employees.
yummyfajitas 11y ago
The same could be said for any other employees. Programmers, warehouse workers or whatever. Maybe they could be paid for the difference they make too. Yet this doesn't happen, because the supply side is important as well, as well as the lack of power these people have. No, this can't be said for every other employee. The best warehouse worker is not adding $1B or anything close to it to the bottom line. It can be said for some programmers and these programmers do tend to make lots of money. (Though in many cases they are given titles other than "programmer", e.g. "managing director" of a team of 0.) See also top traders - at many firms they can make more than the CEO. The fact that not all CEOs are perfect doesn't contradict this claim. In fact, if you are attributing JC Penny's 32% loss to the CEO you are supporting the claim of gizi.

freddref 11y ago

There's a lot of pretty big "if"s in this comment. Good example of the line of thinking discussed in the article.

jib 11y ago

This is an argument that a lot of people make in a lot of business cases. It is not a correct argument. Find huge amount. Say "if only X%" (usually 1% or something else low) then increase of 1%*huge amount which is still a huge amount! Somehow the argument of "if only X%" is meant to avoid the need to prove that you can, in fact, do X%. 1% of extra revenue is hard. 1% time save across the board is hard. If you claim 1%, you better have some strong arguments as to how you can achieve 1%, not do "handwavy do something with synergy or extra information - even if we just get 1% which is a low number, 1% of something huge is still huge. We think we can do more than 1%!". It is almost as pervasive as hindsight arguments that ignore risk costs. "I put all my money on black at the roulette table and my business is up 100% in the last year - I will bring huge wins to you".

jacquesm 11y ago
It is a partially correct argument. If you apply a method to something small and it has an x% effect then your compensation will always be limited by that upside. Applying that same method (or knowledge) to a larger entity potentially has a larger upside and so your room for negotiation expands. Whether or not the difference in percentage is the same is of course debatable but if there is an upside in both cases then the upside is likely to be larger in absolute terms when applied to the larger company. And so those large companies will be able to pay higher compensation for the same skill levels. That's not at all the same as playing roulette and it does not mean this argument is not correct. It's correct in principle, you may want to argue about the degree to which it transfers from smaller companies to larger companies.
- marcosdumay 11y ago
  No, it's not valid. It failed to address the fact that it may not even be possible to increase anything. What if revenue is limited by the product? Then it's not the CEO that can impact it. What if the odds of ever changing anything fall as the company grows? Then there's no scale gain for the CEO's work. There's a huge number of problems that may impede that scenario, and the argument just distracts people away from those.

paulsutter 11y ago

Do you have a methodology for determining the revenue impact attributable directly to the CEO? Something that doesn't involve insta-cloning all the other employees and customers for A/B tests.

TheOtherHobbes 11y ago
You have a good point, but it's clear that CEOs do have a huge effect on company fortunes. When you get a rockstar CEO, the upside is obvious. And when you get an idiot CEO, so is the downside. Kind of. One problem is that Wall St isn't great at distinguishing between idiot CEOs who sweat companies in the short term but kill them in the long term, M&A shopaholic and management-by-rebrand CEOs who flap around doing a lot of useless stuff with no actual clue, rock stars who grow companies with a vision, and bullshit CEOs who churn through investor cash and wishful thinking but create no real profitability.
- doppelganger27 11y ago
  The issue of distinguishing high-quality execs from low-quality ones is one of the points mentioned in the Jacquart & Armstrong paper that I think the article was referencing[1]. 1. http://knowledge.wharton.upenn.edu/wp-content/uploads/2014/02/Armstrong-paper1.pdf http://knowledge.wharton.upenn.edu/wp-content/uploads/2014/0...

RobertoG 11y ago

I think that if it was my business, I would prefer to hire a good CEO, instead of a star, and use the rest of the money to hire one hundred talented CEO assistants with different expertises. Sounds like a better investment.

vlehto 11y ago
Lets assume that CEO can fuck up so bad that it will bancrupt a company. Star CEO has 0,1% chance of fuck up/year. Good CEO has 0,2% chance. And completely mediocre would be about 0,4%. Hire three mediocre dudes to CEO the company so that they are always deciding on everything together. You have now 0,064% yearly chance of bancrupty, while you can easily pay them just 300k each. It seems like high CEO pay is often a result of CEO holding the company as hostage. Not not necessarily conciously, but from shareowners point of view. Distribute the risk of bad moves and you should get OK performance cheaply.
- RobertoG 11y ago
  So, more expertise and more hands make the task riskier? Too many cooks spoil the broth, but a good cook with a hundred scullions can make a lot of good food and investigate a lot of recipes.
  - vlehto 11y ago
    CEO is just a human. With about 16 wake hours per day. When company get's big enough, the role of CEO gets more and more about enabling the employees to create value. Consistency is valuable on it's own right. And it increases as company gets bigger. Companies typically have board to put a degree of democracy in the big moves. So that mistakes get unlikely as 10 people are not very likely to do the same mistake at the same time. But they are not part of day to day operations, so they usually suffer from lack of data.

anon4 11y ago

You can get the exact same increase in profits by investing 10 million a year in a talented group of developers and having them produce mobile games. Or a fleet of truck drivers. Or anything, really. 10mil/yr is enough to finance a small enterprise, so you can realistically branch out into anything that makes money.

andrewclunn 11y ago

Well yeah, if I just make up numbers and imagine a world where a single CEO would have the same impact on multiple companies. Of course that's not reality at all, well unless the increase in revenue comes from political connections that supply legislation that favors your business of course.

restalis 11y ago

Imagine a company doing $12 billion in yearly revenue. If "the right guy" manages the joint, it will do $11 billion. Are you willing to pay 10 million a year for this person?

lmm 11y ago

If a given CEO really is 10% better than the guy who'd do it for $49 million less, then sure, he's a bargain. But is there any evidence that he's actually 10% better?

Mikeb85 11y ago

Yet most CEOs don't increase performance to that degree. Steve Jobs was a founder, not an MBA placed on the job.

dikdik 11y ago

Upping the revenue from 10B dollars to 11B relies on the infrastructure, capital, corporate relationships, etc, etc that were previously built by a company. The new CEO didn't just create 1B of additional wealth out of thin air, he was provided a lot of expensive tools to carry out his vision.