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I'm not arguing that this is the way it SHOULD be, but as far as I can tell the difference stems from a perceived difference in "area of effect". For example, a

I'm not arguing that this is the way it SHOULD be, but as far as I can tell the difference stems from a perceived difference in "area of effect". For example, an assembly line worker's job is to physically make as many widgets per hour as possible at high quality. Maybe the limit of human ability is 100 widgets/hr. If the company CEO replaces half of the workers with robots that can make 1,000 widgets/hr, the workers won't benefit from that because they're still making 100 widgets/hr, while the executive just 5x'd the factory's output, which is likely to be worth a bonus. That's simple enough, but there's a problem with this line of reasoning. What if, rather than replacing the workers, the CEO gives half of them a WidgetTool3000, which allows workers to make 1,000 widgets/hr with no extra training or effort? From the executive's position, she just did the same thing: She adjusted the process to 5x the factory's output by adding a piece of technology. But half of the workers are now producing 10x more widgets, so shouldn't they get a piece of the newly created wealth too? (Here's where I toss in the disclaimer of "this is how it works, but I'm not going to comment on the morality of it") The answer is no, according to corporate tradition. The market has already determined that the value of a worker with a set level of training and ability is $X. Amplifying the worker's output doesn't change anything about the value of the worker (in fact, nothing has changed about the worker at all. He could be swapped with someone not using a WidgetTool with no loss in value for the company) - the WidgetTool is what has created the extra value for the company - it doesn't matter who uses it. On the other hand, it sure as hell feels like crap to be the guy making 10x the widgets for the same pay.

eecc 9y ago
Assumptions, assumptions... doesn’t the 10x tool require proper training and handling?
crdoconnor 9y ago
>If the company CEO replaces half of the workers with robots that can make 1,000 widgets/hr, the workers won't benefit from that because they're still making 100 widgets/hr, while the executive just 5x'd the factory's output, which is likely to be worth a bonus. Where's the value add of the CEO here? They didn't create the robot. They are not operating it. They're a middleman. Middlemen should typically have very low margins in an efficient market.
- JabrZer0 9y ago
  You're getting at the heart of it here, I think. The CEO's job in this case was to gather the information necessary to make a good decision about which robot to purchase, then use her (hopefully) experienced judgement to make the best possible decision for the value of the company. There's definitely some value to that process, but I think most people would agree that it's not worth the multi-million dollar bonus she'd probably get from the 5x productivity increase. Executive pay being tied to company performance is a good thing for the health of the company (no comment on whether that's "good" or "bad" overall) as long as the metrics are defined correctly, but at some point the absolute amount of compensation lost its relationship with the actual effect the CEO has on the company. But that makes sense... I mean what do you expect to happen when people essentially set their own pay? The "in" club of board membership is very much a real thing, and responsible behavior at the expense of other board members is easy enough to punish at another company's board meeting where the pecking order is reversed.
  - sokoloff 9y ago
    Depending on the scale of the increase, I have no problem with her multi-million dollar bonus as a result of superior business outcomes generated under her leadership. Hell, I don’t even care if she was originally opposed to buying the robots and only decided to after a compelling presentation from the COO. The buck stops with her and if she generates superior results in 8-10 figures, multi-million payouts aren’t hard for me to swallow as a shareholder, employee, or customer.
    - lovich 9y ago
      That would make sense if CEOs had some downside to failure, but they don't anymore. All though CEOs who have golden parachutes to cover their failure, and massive salaries to cover their successes mean there is no connection between performance and pay. They just get a lot all of the time
- bluGill 9y ago
  The CEO is not a middleman. The CEO is the one who does the market research to decide if the market can absorb making 1000 widgets/hr, or if it will saturate and cause him to be unable to make payments on the robot and thus go bankrupt. The CEO is the one who decides if they put R&D into making widget 2.0 (which the robot wouldn't be able to make but the humans can), or if widget 2.0 couldn't be enough better to be worth the R&D and thus isn't worth it. The CEO is the one who sees competition coming from China and realizing he cannot compete and comes up with a plan to do something else so that as China is ramping up he is ramping down and transitioning. The above is a very hard job with hundreds of places where some decision could be wrong. A good CEO generally makes enough good decisions that the company stays open for years, while a bad CEO will make decisions that cause the company to go out of business.
skookumchuck 9y ago
> making 10x the widgets for the same pay That's assuming a static system. Large increases in output and margin attract competitors which reduces margin. Things will reach a steady state again where the margin matches the opportunity cost. It's very difficult for a company to sustain a margin advantage. Also, productivity increases lead to price reductions, which lead to the increased output per labor not necessarily meaning the labor value goes up.

eecc 9y ago

Assumptions, assumptions... doesn’t the 10x tool require proper training and handling?

crdoconnor 9y ago

>If the company CEO replaces half of the workers with robots that can make 1,000 widgets/hr, the workers won't benefit from that because they're still making 100 widgets/hr, while the executive just 5x'd the factory's output, which is likely to be worth a bonus. Where's the value add of the CEO here? They didn't create the robot. They are not operating it. They're a middleman. Middlemen should typically have very low margins in an efficient market.

JabrZer0 9y ago
You're getting at the heart of it here, I think. The CEO's job in this case was to gather the information necessary to make a good decision about which robot to purchase, then use her (hopefully) experienced judgement to make the best possible decision for the value of the company. There's definitely some value to that process, but I think most people would agree that it's not worth the multi-million dollar bonus she'd probably get from the 5x productivity increase. Executive pay being tied to company performance is a good thing for the health of the company (no comment on whether that's "good" or "bad" overall) as long as the metrics are defined correctly, but at some point the absolute amount of compensation lost its relationship with the actual effect the CEO has on the company. But that makes sense... I mean what do you expect to happen when people essentially set their own pay? The "in" club of board membership is very much a real thing, and responsible behavior at the expense of other board members is easy enough to punish at another company's board meeting where the pecking order is reversed.
- sokoloff 9y ago
  Depending on the scale of the increase, I have no problem with her multi-million dollar bonus as a result of superior business outcomes generated under her leadership. Hell, I don’t even care if she was originally opposed to buying the robots and only decided to after a compelling presentation from the COO. The buck stops with her and if she generates superior results in 8-10 figures, multi-million payouts aren’t hard for me to swallow as a shareholder, employee, or customer.
  - lovich 9y ago
    That would make sense if CEOs had some downside to failure, but they don't anymore. All though CEOs who have golden parachutes to cover their failure, and massive salaries to cover their successes mean there is no connection between performance and pay. They just get a lot all of the time
bluGill 9y ago
The CEO is not a middleman. The CEO is the one who does the market research to decide if the market can absorb making 1000 widgets/hr, or if it will saturate and cause him to be unable to make payments on the robot and thus go bankrupt. The CEO is the one who decides if they put R&D into making widget 2.0 (which the robot wouldn't be able to make but the humans can), or if widget 2.0 couldn't be enough better to be worth the R&D and thus isn't worth it. The CEO is the one who sees competition coming from China and realizing he cannot compete and comes up with a plan to do something else so that as China is ramping up he is ramping down and transitioning. The above is a very hard job with hundreds of places where some decision could be wrong. A good CEO generally makes enough good decisions that the company stays open for years, while a bad CEO will make decisions that cause the company to go out of business.

skookumchuck 9y ago

> making 10x the widgets for the same pay That's assuming a static system. Large increases in output and margin attract competitors which reduces margin. Things will reach a steady state again where the margin matches the opportunity cost. It's very difficult for a company to sustain a margin advantage. Also, productivity increases lead to price reductions, which lead to the increased output per labor not necessarily meaning the labor value goes up.