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> I think you are missing the subtlety of the theory There's nothing "subtle" about a plain racket. And there's nothing subtle anymore, either, about bringing

> I think you are missing the subtlety of the theory There's nothing "subtle" about a plain racket. And there's nothing subtle anymore, either, about bringing in the Ayn Rand style of "debating" by putting people down. At 1000x pay gap, the CEO needs only work a few months to have nothing to worry about for the rest of his life. Anything on top of that, anything, is a luxury item. "Risk" of what? Having to manage with only 2 yachts instead of the customary 3? Right, that's a serious existential threat, gotta mitigate it. Shave a couple orders of magnitude off that pay gap, and then the argument might, just might, begin to make sense.

drakonandor 10y ago
Why do you think that the shareholders don't have a right to offer generous compensation packages to those they consider good leadership talent?
- Florin_Andrei 10y ago
  Why do I think something I don't actually think? Shareholders, in theory, should have the right to make any decision that is legal and is advantageous to them. That's what I think should happen, in an ideal world. The practice, however, is different. The entity that decides CEO compensation is not "we the people". It's more like the smoke-filled room at the Republican Party's HQ in The Simpsons.
  - drakonandor 10y ago
    Shareholders do decide. You seem to be implying that shareholders are being cheated, however, if they are actually unhappy they can a. sell (or not invest in the first place if they don't like the representation they'll receive), or b. vote in a new board, or c. sue. You are struggling hard to make a victim where everyone involved is happy.
    - wstrange 10y ago
      I don't think it is that simple. There is a tremendous amount of back scratching that goes on when setting executive pay. The board hires pay consultants, the consultants are not going to rock the boat and suggest pay cuts, so they approve a nice increase over the current going rate. Rinse and repeat and you have out of control executive compensation. Majority shareholders are often in the same position - very well paid, and well connected with other CxOs. That leaves the rest of the shareholders along for the ride.
    - Florin_Andrei 10y ago
      > You are struggling hard Whenever I argue with a staunch defender of social inequality, the put-down tactics are par for the course. "You struggle", "you fail to comprehend the subtlety of the argument". If doesn't take a PhD in psychology to understand why that is. For someone to be pro social inequality, they must believe they are already topkek - or are standing a very good chance to make it. If that is the case, then it's a simple matter of statistics that any random stranger is likely placed lower in the pecking order. Therefore they must be "struggling" to comprehend, etc. There is no "struggle" when you're telling the truth. The higher cognitive load happens when you make stuff up from whole cloth - there are studies showing it, look it up. > everyone involved is happy In this reality, the trends in political news in the last several years show otherwise. Not sure about other realities.
    - gaius 10y ago
      It's not even that. A high-paid CEO is a prestige thing, like a status symbol, for a corporation. "We are great because our leader is great and as proof look how much he/she gets paid". It's like an individual flashing their gold Rolex (or in Marissa Mayer's case, a Cartier).
charrondev 10y ago
Who are you to tell a company how to manage itself and how much they can pay their employees? If the board feel a CEO generates that much value for their company they should definitely pay him/her what they are worth.
- nkurz 10y ago
  Who are you to tell a company how to manage itself and how much they can pay their employees? A citizen, which is to say, part of a group that collectively decides the "rules of engagement" for corporations. Society has chosen to grant certain rights to corporations because society feels that properly regulated corporations are a net benefit. At the point where enough individuals decide that the benefits are no longer sufficient, new rules can and will be made. There is (to me) nothing inherently sacred about allowing amoral corporations to operate in the manner that they decide is most effective for their interests. We've decided that minimum wages are acceptable, that maximum work weeks are a good thing, that certain styles of contracts are unenforceable, and if we wanted to, we could decide that excessive differences in pay are legally unconscionable. There's always a danger that societally we'll make the wrong choices, and that new rules will do more harm than good, but I don't think there is any question that society has a "right" to make such rules? At least no more than there is question that society has the right to make and enforce any other law? Turning it around, who are you to tell us that we can't regulate these companies how we choose?
nkurz 10y ago
And there's nothing subtle anymore, either, about bringing in the Ayn Rand style of "debating" by putting people down. I may be the one missing the subtlety now, but if you are referring to my phrasing, I didn't intend any insult. From your comment (voted below zero before I upvoted and replied) I felt you were being unreasonably dismissive of a potential explanation that I found interesting and had not heard before. There's nothing "subtle" about a plain racket. The theory offers an explanation of why stockholders might rationally offer a generous severance package to a CEO. I agree that the "racket" theory has greater explanatory power, but I found it worth contemplating alternative explanations. Maybe "subtle" is the wrong word? "Counterintuitive"? the CEO needs only work a few months to have nothing to worry about for the rest of his life In practice, though, CEO's worry tremendously about their ability to accumulate further wealth. I wouldn't be surprised if this worry increases the greater their current salary. And from the shareholders' point of view, it's the CEO's perceived risk that affects their decision making, not the actual risk. Shave a couple orders of magnitude off that pay gap, and then the argument might, just might, begin to make sense. Well, no. As a theory to explain current behavior, I think this theory is actually more applicable the greater the discrepancy in pay between the CEO's current job and the other jobs available if they are fired. You are right that the situation would be different the if the gap was less, but that doesn't mean the theory is not relevant when the gap is large. Maybe you'd prefer looking at it from a "Prisoner's Dilemma" perspective. Assume you have a extremely-well-paid self-interested psychopath making the executive decisions for your company. Ideally, this would not be the situation you find yourself in, but let's assume it's the case. Assume that as a rational (read, "amoral") shareholder you wish to maximize your gains, which is positively but nonlinearly correlated to the company's profitability. How do you best achieve this? Perversely (and to me counterintuitively) reducing the downside to the CEO for risky decisions may be a strategy with a positive return.

drakonandor 10y ago

Why do you think that the shareholders don't have a right to offer generous compensation packages to those they consider good leadership talent?

Florin_Andrei 10y ago
Why do I think something I don't actually think? Shareholders, in theory, should have the right to make any decision that is legal and is advantageous to them. That's what I think should happen, in an ideal world. The practice, however, is different. The entity that decides CEO compensation is not "we the people". It's more like the smoke-filled room at the Republican Party's HQ in The Simpsons.
- drakonandor 10y ago
  Shareholders do decide. You seem to be implying that shareholders are being cheated, however, if they are actually unhappy they can a. sell (or not invest in the first place if they don't like the representation they'll receive), or b. vote in a new board, or c. sue. You are struggling hard to make a victim where everyone involved is happy.
  - wstrange 10y ago
    I don't think it is that simple. There is a tremendous amount of back scratching that goes on when setting executive pay. The board hires pay consultants, the consultants are not going to rock the boat and suggest pay cuts, so they approve a nice increase over the current going rate. Rinse and repeat and you have out of control executive compensation. Majority shareholders are often in the same position - very well paid, and well connected with other CxOs. That leaves the rest of the shareholders along for the ride.
  - Florin_Andrei 10y ago
    > You are struggling hard Whenever I argue with a staunch defender of social inequality, the put-down tactics are par for the course. "You struggle", "you fail to comprehend the subtlety of the argument". If doesn't take a PhD in psychology to understand why that is. For someone to be pro social inequality, they must believe they are already topkek - or are standing a very good chance to make it. If that is the case, then it's a simple matter of statistics that any random stranger is likely placed lower in the pecking order. Therefore they must be "struggling" to comprehend, etc. There is no "struggle" when you're telling the truth. The higher cognitive load happens when you make stuff up from whole cloth - there are studies showing it, look it up. > everyone involved is happy In this reality, the trends in political news in the last several years show otherwise. Not sure about other realities.
  - gaius 10y ago
    It's not even that. A high-paid CEO is a prestige thing, like a status symbol, for a corporation. "We are great because our leader is great and as proof look how much he/she gets paid". It's like an individual flashing their gold Rolex (or in Marissa Mayer's case, a Cartier).

charrondev 10y ago

Who are you to tell a company how to manage itself and how much they can pay their employees? If the board feel a CEO generates that much value for their company they should definitely pay him/her what they are worth.

nkurz 10y ago
Who are you to tell a company how to manage itself and how much they can pay their employees? A citizen, which is to say, part of a group that collectively decides the "rules of engagement" for corporations. Society has chosen to grant certain rights to corporations because society feels that properly regulated corporations are a net benefit. At the point where enough individuals decide that the benefits are no longer sufficient, new rules can and will be made. There is (to me) nothing inherently sacred about allowing amoral corporations to operate in the manner that they decide is most effective for their interests. We've decided that minimum wages are acceptable, that maximum work weeks are a good thing, that certain styles of contracts are unenforceable, and if we wanted to, we could decide that excessive differences in pay are legally unconscionable. There's always a danger that societally we'll make the wrong choices, and that new rules will do more harm than good, but I don't think there is any question that society has a "right" to make such rules? At least no more than there is question that society has the right to make and enforce any other law? Turning it around, who are you to tell us that we can't regulate these companies how we choose?

nkurz 10y ago

And there's nothing subtle anymore, either, about bringing in the Ayn Rand style of "debating" by putting people down. I may be the one missing the subtlety now, but if you are referring to my phrasing, I didn't intend any insult. From your comment (voted below zero before I upvoted and replied) I felt you were being unreasonably dismissive of a potential explanation that I found interesting and had not heard before. There's nothing "subtle" about a plain racket. The theory offers an explanation of why stockholders might rationally offer a generous severance package to a CEO. I agree that the "racket" theory has greater explanatory power, but I found it worth contemplating alternative explanations. Maybe "subtle" is the wrong word? "Counterintuitive"? the CEO needs only work a few months to have nothing to worry about for the rest of his life In practice, though, CEO's worry tremendously about their ability to accumulate further wealth. I wouldn't be surprised if this worry increases the greater their current salary. And from the shareholders' point of view, it's the CEO's perceived risk that affects their decision making, not the actual risk. Shave a couple orders of magnitude off that pay gap, and then the argument might, just might, begin to make sense. Well, no. As a theory to explain current behavior, I think this theory is actually more applicable the greater the discrepancy in pay between the CEO's current job and the other jobs available if they are fired. You are right that the situation would be different the if the gap was less, but that doesn't mean the theory is not relevant when the gap is large. Maybe you'd prefer looking at it from a "Prisoner's Dilemma" perspective. Assume you have a extremely-well-paid self-interested psychopath making the executive decisions for your company. Ideally, this would not be the situation you find yourself in, but let's assume it's the case. Assume that as a rational (read, "amoral") shareholder you wish to maximize your gains, which is positively but nonlinearly correlated to the company's profitability. How do you best achieve this? Perversely (and to me counterintuitively) reducing the downside to the CEO for risky decisions may be a strategy with a positive return.