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> CEOs interests are aligned perfectly in this situation: increase shareholder value. That is wrong. The CEO's risk is asymmetric. Huge upside with limited dow

by pg314 9y ago

> CEOs interests are aligned perfectly in this situation: increase shareholder value. That is wrong. The CEO's risk is asymmetric. Huge upside with limited downside, which encourages reckless risk taking. It is also shorter term (until his grants vest), encouraging short term profit over long term value. > I don't quite grok the idea that employees with no ownership stake in the company are somehow owed a share of the capital gain when they've got no capital of their own at risk. Is the CEO not an employee? Why would he be owed a share of the capital gain, and other workers not?

Nrsolis 9y ago
His risk isn't asymmetric. He (or she) has got to justify their job each and every quarter to the investors. A couple of bad quarters and you can expect the shareholders to be looking for a scalp and it's usually the CEO. I think you maybe underestimate the job market for senior executives. It's not like a CEO of a S&P500 company can find another job on LinkedIn. Sometimes they land a new gig. A lot of the times they don't. I'd also suggest you try the job of leading people and groups of that size. There are very few who can do this sort of work effectively. Also consider that a CEO has to consider the types of challenges he or she would like to tackle. A Board of Directors is shopping for talent and trying to get the right fit. Why does a CEO not get the same opportunity to negotiate a pay package?
- s73ver_ 9y ago
  "His risk isn't asymmetric. He (or she) has got to justify their job each and every quarter to the investors. A couple of bad quarters and you can expect the shareholders to be looking for a scalp and it's usually the CEO." But what actual risk is the CEO taking? Sure, the board might decide to let them go. But that usually comes with a multi-million dollar severance package. They're not hurting. There is no practical downside. On the other hand, someone who gets laid off because of the company tanking does get hurt, through no fault of their own. "I think you maybe underestimate the job market for senior executives. It's not like a CEO of a S&P500 company can find another job on LinkedIn. Sometimes they land a new gig. A lot of the times they don't." They land on their feet more often than not. And, again, they're not hurting for money. If they don't find another job, their children are not going to go hungry.
  - Nrsolis 9y ago
    If you got fired from a job that had a potential $500M payday attached to it and only got a $25M severance package at the end of it, trust me, you'd be pretty bummed about it. Go looking for CEOs that got fired and see where they landed. it's one and done for a lot of them. Again, there is no room for socialist populism here. He negotiated a package and he delivered results. His interests as a CEO are aligned with the shareholders who risk their capital with ownership of the company. They trust the board and the CEO to increase the value of their investment. Why is this controversial? Why does it matter if he's rich before or after he does the job? All of these guys are already wealthy before they even sign up. They don't need to do this work to survive. Somehow the notion seems to go around that anyone who makes a boatload of money suddenly has to kowtow to the public on whether or not they deserve that money. That's not how this works.
    - s73ver_ 9y ago
      "If you got fired from a job that had a potential $500M payday attached to it and only got a $25M severance package at the end of it, trust me, you'd be pretty bummed about it." I'd be bummed. That's it. I wouldn't be wondering if I was going to lose my house, or if I'd still be able to eat. " His interests as a CEO are aligned with the shareholders who risk their capital with ownership of the company. " But not with the interests of the employees who risk their human capital. "Why is this controversial?" Because those who do the majority of the work making the company successful are not rewarded for it.
      - Nrsolis 9y ago
        Well, in this great country, you're perfectly welcome to start your own company and distribute 95% of the shares to your first 1000 employees. Tell them they need to work for free for 4 years (or for far below market wages) in order to account for the capital contribution of their labor, comrade, and see how far that gets you. Ben and Jerry's tried to cap CEO pay at 7x their lowest paid worker and soon realized that nobody wanted the job (or at least nobody that was qualified). Now their current CEO is taking home a whole lot more than that and he's not being paid in Chubby Hubby. http://abcnews.go.com/Business/companies-follow-ben-jerrys-lead-wages/story?id=19920634 http://abcnews.go.com/Business/companies-follow-ben-jerrys-l... "I'm talking about Ben Cohen and Jerry Greenfield and their iconoclastic Ben & Jerry's ice cream company. But it's neither Cherry Garcia nor Phish Food that's on my mind right now—well, maybe just a little—as much as it is the social pact that Messrs. Cohen and Greenfield made with their employees at the start of their venture: From top to bottom, the pay ratio between the highest salaried executive and lowest-earning-worker would be no greater than 5 to 1. To their credit, the ice cream kings kept to their pay scale deal for 16 years. At that point, Cohen was set to retire and no successor who was willing to accept B&J's compensation compact could be found. End of an Era So the bar was raised to 7 to 1 to attract new talent, and ultimately to 17 to 1 over the course of a half dozen years more. The company was then acquired by Unilever USA in 2000, after which the corporate cone of silence descended on what was once a very transparent practice."
bkanber 9y ago
> Huge upside with limited downside From your perspective, sure, especially if you're only considering financial downside. There are huge non-financial downside risks, like staking your personal reputation on the performance of the 50,000 person company that you're running. Maybe you don't personally care about those other risks, but CEOs in that position do. > encourages reckless risk taking Not all CEOs take reckless risks. > encouraging short term profit over long term value This is a function of shareholders, not of CEOs. > Is the CEO not an employee? No, the CEO is an Officer of the Corporation and is literally held accountable for the performance of the company. An employee is not. The CEO and CFO of public companies can go to jail for misleading investors, insider trading, falsifying financial reports, etc. There is no such law that holds employees accountable for those things. > Why would he be owed a share of the capital gain, and other workers not? Because he owns stock. Anyone is free to buy shares of a public company. Any employee can buy stock and therefore take a share of the capital gain. There are lots of companies that give workers options and even stock grants. CEO compensation packages are designed to be heavy on stock so that the incentive to increase shareholder value becomes personal.
- jimbokun 9y ago
  "There are huge non-financial downside risks, like staking your personal reputation on the performance of the 50,000 person company that you're running." That doesn't actually happen. CEOs get golden parachutes and move on to high paid jobs somewhere else when their company does poorly.
  - bkanber 9y ago
    What about my other points?

by pg314 9y ago

Nrsolis 9y ago

His risk isn't asymmetric. He (or she) has got to justify their job each and every quarter to the investors. A couple of bad quarters and you can expect the shareholders to be looking for a scalp and it's usually the CEO. I think you maybe underestimate the job market for senior executives. It's not like a CEO of a S&P500 company can find another job on LinkedIn. Sometimes they land a new gig. A lot of the times they don't. I'd also suggest you try the job of leading people and groups of that size. There are very few who can do this sort of work effectively. Also consider that a CEO has to consider the types of challenges he or she would like to tackle. A Board of Directors is shopping for talent and trying to get the right fit. Why does a CEO not get the same opportunity to negotiate a pay package?

s73ver_ 9y ago
"His risk isn't asymmetric. He (or she) has got to justify their job each and every quarter to the investors. A couple of bad quarters and you can expect the shareholders to be looking for a scalp and it's usually the CEO." But what actual risk is the CEO taking? Sure, the board might decide to let them go. But that usually comes with a multi-million dollar severance package. They're not hurting. There is no practical downside. On the other hand, someone who gets laid off because of the company tanking does get hurt, through no fault of their own. "I think you maybe underestimate the job market for senior executives. It's not like a CEO of a S&P500 company can find another job on LinkedIn. Sometimes they land a new gig. A lot of the times they don't." They land on their feet more often than not. And, again, they're not hurting for money. If they don't find another job, their children are not going to go hungry.
- Nrsolis 9y ago
  If you got fired from a job that had a potential $500M payday attached to it and only got a $25M severance package at the end of it, trust me, you'd be pretty bummed about it. Go looking for CEOs that got fired and see where they landed. it's one and done for a lot of them. Again, there is no room for socialist populism here. He negotiated a package and he delivered results. His interests as a CEO are aligned with the shareholders who risk their capital with ownership of the company. They trust the board and the CEO to increase the value of their investment. Why is this controversial? Why does it matter if he's rich before or after he does the job? All of these guys are already wealthy before they even sign up. They don't need to do this work to survive. Somehow the notion seems to go around that anyone who makes a boatload of money suddenly has to kowtow to the public on whether or not they deserve that money. That's not how this works.
  - s73ver_ 9y ago
    "If you got fired from a job that had a potential $500M payday attached to it and only got a $25M severance package at the end of it, trust me, you'd be pretty bummed about it." I'd be bummed. That's it. I wouldn't be wondering if I was going to lose my house, or if I'd still be able to eat. " His interests as a CEO are aligned with the shareholders who risk their capital with ownership of the company. " But not with the interests of the employees who risk their human capital. "Why is this controversial?" Because those who do the majority of the work making the company successful are not rewarded for it.
    - Nrsolis 9y ago
      Well, in this great country, you're perfectly welcome to start your own company and distribute 95% of the shares to your first 1000 employees. Tell them they need to work for free for 4 years (or for far below market wages) in order to account for the capital contribution of their labor, comrade, and see how far that gets you. Ben and Jerry's tried to cap CEO pay at 7x their lowest paid worker and soon realized that nobody wanted the job (or at least nobody that was qualified). Now their current CEO is taking home a whole lot more than that and he's not being paid in Chubby Hubby. http://abcnews.go.com/Business/companies-follow-ben-jerrys-lead-wages/story?id=19920634 http://abcnews.go.com/Business/companies-follow-ben-jerrys-l... "I'm talking about Ben Cohen and Jerry Greenfield and their iconoclastic Ben & Jerry's ice cream company. But it's neither Cherry Garcia nor Phish Food that's on my mind right now—well, maybe just a little—as much as it is the social pact that Messrs. Cohen and Greenfield made with their employees at the start of their venture: From top to bottom, the pay ratio between the highest salaried executive and lowest-earning-worker would be no greater than 5 to 1. To their credit, the ice cream kings kept to their pay scale deal for 16 years. At that point, Cohen was set to retire and no successor who was willing to accept B&J's compensation compact could be found. End of an Era So the bar was raised to 7 to 1 to attract new talent, and ultimately to 17 to 1 over the course of a half dozen years more. The company was then acquired by Unilever USA in 2000, after which the corporate cone of silence descended on what was once a very transparent practice."

bkanber 9y ago

> Huge upside with limited downside From your perspective, sure, especially if you're only considering financial downside. There are huge non-financial downside risks, like staking your personal reputation on the performance of the 50,000 person company that you're running. Maybe you don't personally care about those other risks, but CEOs in that position do. > encourages reckless risk taking Not all CEOs take reckless risks. > encouraging short term profit over long term value This is a function of shareholders, not of CEOs. > Is the CEO not an employee? No, the CEO is an Officer of the Corporation and is literally held accountable for the performance of the company. An employee is not. The CEO and CFO of public companies can go to jail for misleading investors, insider trading, falsifying financial reports, etc. There is no such law that holds employees accountable for those things. > Why would he be owed a share of the capital gain, and other workers not? Because he owns stock. Anyone is free to buy shares of a public company. Any employee can buy stock and therefore take a share of the capital gain. There are lots of companies that give workers options and even stock grants. CEO compensation packages are designed to be heavy on stock so that the incentive to increase shareholder value becomes personal.

jimbokun 9y ago
"There are huge non-financial downside risks, like staking your personal reputation on the performance of the 50,000 person company that you're running." That doesn't actually happen. CEOs get golden parachutes and move on to high paid jobs somewhere else when their company does poorly.
- bkanber 9y ago
  What about my other points?