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Why has our society organized itself so that company executives win whether or not they do a good job? One of the premises of giving executives high pay is that

by lovich 8y ago

Why has our society organized itself so that company executives win whether or not they do a good job? One of the premises of giving executives high pay is that they are getting it for succeeding at running the business well, but as we see time and time again they still get paid out even when they fail. How is it this efficient or moral? We've got the worst of both worlds here and it's because the people getting the benefits are the ones making the rules.

bdhess 8y ago
It’s not like society is organized this way intentionally. It’s just the reality of Goodhart’s Law [0] in action. We haven’t found a way of measuring success that isn’t gameable. [0] https://en.m.wikipedia.org/wiki/Goodhart%27s_law https://en.m.wikipedia.org/wiki/Goodhart%27s_law
- lovich 8y ago
  You've got a point. I suppose my question was more towards the people who argue that this is perfectly ok because these executives take on "risk" by making sure they get paid either way. It's one thing to say this is how it is because they managed to pull it off. It's another to say it's completely justifiable ethically
aantix 8y ago
Because they take on the risk and burden of carrying a company with 1,000’s of employees and a similar number of shareholders. It’s incredibly stressful whether successful or not. It’s not like 5pm rolls around and these people get to roll home and forget about things. You’re an absolute outlier if you even want one of these positions. (And no, I am not one of these people, I like seeing my kids in the evenings).
- lovich 8y ago
  They literally are not taking on the risk if they get the high pay whether they succeed or lose. The not being able to see your kids in the evening is one thing, but the high paid executives also get around that too. For instance Marissa Mayer having an office in the headquarters converted into a daycare for her child. Did her employees who were also on call(and forced to stop working remotely) get the opportunity to use company property for a daycare for their children? My point is that these arguments about why it's worth it to pay executives these super high salaries no longer hold any water, because we've seen that they've rigged the game to be effectively riskless to them. Only getting 80% of your expected payout when you run a company into the ground _and_ remove payouts to the other employees is not a risk to justify being paid 100s of times more than an average employee. It's just another case of making the risks public and the gains private
  - anonuser123456 8y ago
    The risks are entirely private. Shareholders and lender capital is at risk, not the general public.
    - lovich 8y ago
      The general public includes these employees who are not getting their bonuses/severance that was promised because executives need to be paid out first. Then we have people who need unemployment to cover their lives that would have been covered by said payments. It's the same issue with Walmart and McDonald's paying too little to live on and teaching their employees how to sign up for benefits
    - eigenvector 8y ago
      When a big company goes bust and lays off thousands of workers or even defaults on pension obligations (I know Sears did in Canada I don't know if they did in the US), it's the public who pick up the costs through unemployment benefits and welfare payments.
      - rlucas 8y ago
        Your point is well taken when extremes occur (public purse ultimately probably backstops both unemployment and pensions via PBGC) but it’s important for readers to know that’s not the normal case even in a bankruptcy. Unemployment is structured as an insurance program, not a dole, and in theory an employer has paid in over the years enough to actuarially pay for it. Same thing with pensions. The system does have some “normal accident” anti-fragility type stuff built in. But yes, 1. in a catastrophic outcome the public purse will get hit for hard costs and 2. even the “insured” benefits mask lots of externalities that the corporation doesn’t bear but employees and municipalities etc do.
- brianpgordon 8y ago
  Is shouldering the burden of running the company really 312 times as stressful as the average worker's job though? https://www.theguardian.com/business/2018/aug/16/ceo-versus-worker-wage-american-companies-pay-gap-study-2018 https://www.theguardian.com/business/2018/aug/16/ceo-versus-...
  - aantix 8y ago
    Stress is part of the comp. What is needed in a restructuring - access to the right people with capital, long hours to get the deals done, offloading of dead inventory, answering to shareholders, nervous employees, continue making payroll. It's an outlier job. There's not an average employee that has that pedigree and access to take over the job. Nor would the average employee ever want the hours nor are they productive enough.
    - lovich 8y ago
      > There's not an average employee that has that pedigree and access to take over the job. Either this is a tautology or citation needed here. So far the argument for this has been that they bring in the big bucks so of course they deserve high compensation. The empirical evidence so far is that they have the title so they get high compensation, and their performance has little to no affect on that compensation. Risk is normally commensurate with reward, thus if we are observing that there is little to no difference in reward, there must be no little to no risk. I would need to see concrete proof that an exec was worth this high pay beyond, "well what if they weren't there, maybe it would be worse!?!?" Before I believed the argument again
  - aantix 8y ago
    Steve Easterbrook earns $21 million, the average worker just $7,000. But Steve Easterbrook's corporate and branding directives scale across the company and produce 2billion in profit. While local employees service just the customer. Paying someone $21 million that can decisions that result in 2 billion in profit is solid business.
    - 8y ago
anonuser123456 8y ago
Shareholders make the rules. They also lose their equity in bankruptcy. How is this unfair?
- lovich 8y ago
  To the employees, who had their bonuses/severance taken away for paying out the executives. If this was a one time thing I might agree with you, but it's a systemic issue where executives run their companies into the ground and then get paid out still while the employees are left with nothing. The argument has always been that they are paid so much due to the risk they take, but that risk has shown to be non existent. If you were going to follow that argument then the rank and file employees would be getting the high pay since they are left with nothing due to other people's choices
  - edanm 8y ago
    > The argument has always been that they are paid so much due to the risk they take, but that risk has shown to be non existent. Not true. For some of them, earning 10mil might be far less than they would otherwise make. It's sad that some people are so much more (monetarily) valuable than other people, and is a function of a lot of things, most of them unfair, like different life circumstances, different IQ/talent, etc. But that's no one person's fault - I may as well be upset that I'm shorter than average. I mean, I am upset - but not at anyone, just at nature or something.
    - bambataa 8y ago
      Do you believe that the rise in executive pay we've been over the last few decades reflects a rise in executive competence?
      - edanm 8y ago
        I have no idea. It could be a rise in competence - it could be a rise in the size of businesses, bringing a commensurate rise in productivity (the average worker is also more productive, not sure if their salary reflects that though). It could be simply "fashion", or everyone making a mistake, or some kind of weird market condition that will fix itself. I don't think anyone truly knows, just like no one knows if stocks are overpriced right now. Or if compensation for e.g. programmers is also overpriced. It's really, really hard to second-guess the market and get the right answer, and I hesitate to trust people who a) don't know much about the specifics here (not saying that's you), and/or b) don't actually have skin in the game. If the people who are choosing how much to pay executives, and putting their money where their mouth is, are choosing this - well, they could definitely be choosing wrong, but its their money to lose for the most part.
edanm 8y ago
> Why has our society organized itself so that company executives win whether or not they do a good job? It's not like this was specifically planned. Our society is organized as a capitalist society, which means people decide how much and in what conditions to pay others. In this case, the shareholders, via the board, have decided to pay certain compensation. Since it's their money on the line, and they're the ones with far more detailed knowledge of what's actually going on in the company, I don't see why it's any more "moral" for an outsider to second-guess their decision. (Of course, most shareholders aren't in any sense active, but they are supposed to be well represented by the board, and can replace it if need be). > One of the premises of giving executives high pay is that they are getting it for succeeding at running the business well, That's sometimes true. Sometimes even a well run company goes bankrupt, e.g. a video rental company when everyone switches to streaming, in which case the management might be doing a good job by extracting as much value as possible before. (Totally theoretical, I have no idea of the details in this case.) > but as we see time and time again they still get paid out even when they fail. And sometimes, they get paid far less. Sometimes they get paid to not make a mess. Sometimes they get paid because their contracts, negotiated beforehand, stipulate certain payouts whether or not they succeed, apparently because that's the price of hiring these people who are presumably good. Put another way - Michael Jordan was paid a lot of money to play basketball for some teams. They made the agreement based on his past performance. If his team had ended up not doing very well, it wouldn't have made his contract suddenly null and void - at most, future contracts would probably be at a lower price.
disishhsha 8y ago
Why do NFL quarterbacks get paid millions even when they lose? Because they’ll only sign in the first place if their contract gives them that right. Same with execs. Nobody who’s any good will agree to work for a failing company unless they’re guaranteed a payoff. Why try to work on something that’s probably going to fail when there are so many growing companies out there? BTW the same is true for other highly-sought talent like engineers. Big companies on the brink of failure will shell out if that’s what it takes. It’s not special treatment for the “rule-makers”.
michaelt 8y ago
Why has our society organized itself so that company executives win whether or not they do a good job? If you're interested in this subject, you might enjoy reading [1]. It suggests several reasons, including: * Many of the conventional mechanisms put in place to prevent this do not work. For example, the observed behaviour of boards does not resemble arms-length negotiation with executives over pay. "Independent" remuneration committees and external consultants likewise do not effectively represent shareholders' interests. * Shareholders' voting power is very diffuse. If I own one billionth of Google via an index fund in my retirement savings, I ain't exactly got much leverage over them. * Minority shareholder lawsuits and hostile takeovers are relatively powerless in the current age. * Outrage costs - i.e. damage to the executives' reputations and future employment prospects - can often be mitigated by camouflaging big payments [2]. * The few large institutional shareholders don't seem inclined to do much about corporate governance. Some such as CalPERS have done things effectively in the past. [1] https://www.amazon.com/Pay-Without-Performance-Unfulfilled-Compensation/dp/0674016653/ https://www.amazon.com/Pay-Without-Performance-Unfulfilled-C... [2] One example the book gives is a CEO whose pension terms were modified so that it the rate was based on his highest-paid year, with pay defined to include income he made from exercising stock options. A minor change that gave the executive an extra $20 million.

by lovich 8y ago

bdhess 8y ago

It’s not like society is organized this way intentionally. It’s just the reality of Goodhart’s Law [0] in action. We haven’t found a way of measuring success that isn’t gameable. [0] https://en.m.wikipedia.org/wiki/Goodhart%27s_law https://en.m.wikipedia.org/wiki/Goodhart%27s_law

lovich 8y ago
You've got a point. I suppose my question was more towards the people who argue that this is perfectly ok because these executives take on "risk" by making sure they get paid either way. It's one thing to say this is how it is because they managed to pull it off. It's another to say it's completely justifiable ethically

aantix 8y ago

Because they take on the risk and burden of carrying a company with 1,000’s of employees and a similar number of shareholders. It’s incredibly stressful whether successful or not. It’s not like 5pm rolls around and these people get to roll home and forget about things. You’re an absolute outlier if you even want one of these positions. (And no, I am not one of these people, I like seeing my kids in the evenings).

lovich 8y ago
They literally are not taking on the risk if they get the high pay whether they succeed or lose. The not being able to see your kids in the evening is one thing, but the high paid executives also get around that too. For instance Marissa Mayer having an office in the headquarters converted into a daycare for her child. Did her employees who were also on call(and forced to stop working remotely) get the opportunity to use company property for a daycare for their children? My point is that these arguments about why it's worth it to pay executives these super high salaries no longer hold any water, because we've seen that they've rigged the game to be effectively riskless to them. Only getting 80% of your expected payout when you run a company into the ground _and_ remove payouts to the other employees is not a risk to justify being paid 100s of times more than an average employee. It's just another case of making the risks public and the gains private
- anonuser123456 8y ago
  The risks are entirely private. Shareholders and lender capital is at risk, not the general public.
  - lovich 8y ago
    The general public includes these employees who are not getting their bonuses/severance that was promised because executives need to be paid out first. Then we have people who need unemployment to cover their lives that would have been covered by said payments. It's the same issue with Walmart and McDonald's paying too little to live on and teaching their employees how to sign up for benefits
  - eigenvector 8y ago
    When a big company goes bust and lays off thousands of workers or even defaults on pension obligations (I know Sears did in Canada I don't know if they did in the US), it's the public who pick up the costs through unemployment benefits and welfare payments.
    - rlucas 8y ago
      Your point is well taken when extremes occur (public purse ultimately probably backstops both unemployment and pensions via PBGC) but it’s important for readers to know that’s not the normal case even in a bankruptcy. Unemployment is structured as an insurance program, not a dole, and in theory an employer has paid in over the years enough to actuarially pay for it. Same thing with pensions. The system does have some “normal accident” anti-fragility type stuff built in. But yes, 1. in a catastrophic outcome the public purse will get hit for hard costs and 2. even the “insured” benefits mask lots of externalities that the corporation doesn’t bear but employees and municipalities etc do.
brianpgordon 8y ago
Is shouldering the burden of running the company really 312 times as stressful as the average worker's job though? https://www.theguardian.com/business/2018/aug/16/ceo-versus-worker-wage-american-companies-pay-gap-study-2018 https://www.theguardian.com/business/2018/aug/16/ceo-versus-...
- aantix 8y ago
  Stress is part of the comp. What is needed in a restructuring - access to the right people with capital, long hours to get the deals done, offloading of dead inventory, answering to shareholders, nervous employees, continue making payroll. It's an outlier job. There's not an average employee that has that pedigree and access to take over the job. Nor would the average employee ever want the hours nor are they productive enough.
  - lovich 8y ago
    > There's not an average employee that has that pedigree and access to take over the job. Either this is a tautology or citation needed here. So far the argument for this has been that they bring in the big bucks so of course they deserve high compensation. The empirical evidence so far is that they have the title so they get high compensation, and their performance has little to no affect on that compensation. Risk is normally commensurate with reward, thus if we are observing that there is little to no difference in reward, there must be no little to no risk. I would need to see concrete proof that an exec was worth this high pay beyond, "well what if they weren't there, maybe it would be worse!?!?" Before I believed the argument again
- aantix 8y ago
  Steve Easterbrook earns $21 million, the average worker just $7,000. But Steve Easterbrook's corporate and branding directives scale across the company and produce 2billion in profit. While local employees service just the customer. Paying someone $21 million that can decisions that result in 2 billion in profit is solid business.
  - 8y ago

anonuser123456 8y ago

Shareholders make the rules. They also lose their equity in bankruptcy. How is this unfair?

lovich 8y ago
To the employees, who had their bonuses/severance taken away for paying out the executives. If this was a one time thing I might agree with you, but it's a systemic issue where executives run their companies into the ground and then get paid out still while the employees are left with nothing. The argument has always been that they are paid so much due to the risk they take, but that risk has shown to be non existent. If you were going to follow that argument then the rank and file employees would be getting the high pay since they are left with nothing due to other people's choices
- edanm 8y ago
  > The argument has always been that they are paid so much due to the risk they take, but that risk has shown to be non existent. Not true. For some of them, earning 10mil might be far less than they would otherwise make. It's sad that some people are so much more (monetarily) valuable than other people, and is a function of a lot of things, most of them unfair, like different life circumstances, different IQ/talent, etc. But that's no one person's fault - I may as well be upset that I'm shorter than average. I mean, I am upset - but not at anyone, just at nature or something.
  - bambataa 8y ago
    Do you believe that the rise in executive pay we've been over the last few decades reflects a rise in executive competence?
    - edanm 8y ago
      I have no idea. It could be a rise in competence - it could be a rise in the size of businesses, bringing a commensurate rise in productivity (the average worker is also more productive, not sure if their salary reflects that though). It could be simply "fashion", or everyone making a mistake, or some kind of weird market condition that will fix itself. I don't think anyone truly knows, just like no one knows if stocks are overpriced right now. Or if compensation for e.g. programmers is also overpriced. It's really, really hard to second-guess the market and get the right answer, and I hesitate to trust people who a) don't know much about the specifics here (not saying that's you), and/or b) don't actually have skin in the game. If the people who are choosing how much to pay executives, and putting their money where their mouth is, are choosing this - well, they could definitely be choosing wrong, but its their money to lose for the most part.

edanm 8y ago

> Why has our society organized itself so that company executives win whether or not they do a good job? It's not like this was specifically planned. Our society is organized as a capitalist society, which means people decide how much and in what conditions to pay others. In this case, the shareholders, via the board, have decided to pay certain compensation. Since it's their money on the line, and they're the ones with far more detailed knowledge of what's actually going on in the company, I don't see why it's any more "moral" for an outsider to second-guess their decision. (Of course, most shareholders aren't in any sense active, but they are supposed to be well represented by the board, and can replace it if need be). > One of the premises of giving executives high pay is that they are getting it for succeeding at running the business well, That's sometimes true. Sometimes even a well run company goes bankrupt, e.g. a video rental company when everyone switches to streaming, in which case the management might be doing a good job by extracting as much value as possible before. (Totally theoretical, I have no idea of the details in this case.) > but as we see time and time again they still get paid out even when they fail. And sometimes, they get paid far less. Sometimes they get paid to not make a mess. Sometimes they get paid because their contracts, negotiated beforehand, stipulate certain payouts whether or not they succeed, apparently because that's the price of hiring these people who are presumably good. Put another way - Michael Jordan was paid a lot of money to play basketball for some teams. They made the agreement based on his past performance. If his team had ended up not doing very well, it wouldn't have made his contract suddenly null and void - at most, future contracts would probably be at a lower price.

disishhsha 8y ago

Why do NFL quarterbacks get paid millions even when they lose? Because they’ll only sign in the first place if their contract gives them that right. Same with execs. Nobody who’s any good will agree to work for a failing company unless they’re guaranteed a payoff. Why try to work on something that’s probably going to fail when there are so many growing companies out there? BTW the same is true for other highly-sought talent like engineers. Big companies on the brink of failure will shell out if that’s what it takes. It’s not special treatment for the “rule-makers”.

michaelt 8y ago

Why has our society organized itself so that company executives win whether or not they do a good job? If you're interested in this subject, you might enjoy reading [1]. It suggests several reasons, including: * Many of the conventional mechanisms put in place to prevent this do not work. For example, the observed behaviour of boards does not resemble arms-length negotiation with executives over pay. "Independent" remuneration committees and external consultants likewise do not effectively represent shareholders' interests. * Shareholders' voting power is very diffuse. If I own one billionth of Google via an index fund in my retirement savings, I ain't exactly got much leverage over them. * Minority shareholder lawsuits and hostile takeovers are relatively powerless in the current age. * Outrage costs - i.e. damage to the executives' reputations and future employment prospects - can often be mitigated by camouflaging big payments [2]. * The few large institutional shareholders don't seem inclined to do much about corporate governance. Some such as CalPERS have done things effectively in the past. [1] https://www.amazon.com/Pay-Without-Performance-Unfulfilled-Compensation/dp/0674016653/ https://www.amazon.com/Pay-Without-Performance-Unfulfilled-C... [2] One example the book gives is a CEO whose pension terms were modified so that it the rate was based on his highest-paid year, with pay defined to include income he made from exercising stock options. A minor change that gave the executive an extra $20 million.