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I've read that since CEOs are appointed by a board, and since CEO pay is public knowledge, that Boards don't want to "look bad", that they've "picked the right
by vxxzy 7y ago
I've read that since CEOs are appointed by a board, and since CEO pay is public knowledge, that Boards don't want to "look bad", that they've "picked the right person for the job". They only put in "winners" - and you don't pay a winner less than the "known market rate". This has the affect of the "average" moving up. Is this really a legitimate reason for the increase in CEO compensation?
- devoply 7y agoDoes any person deserve a 1000% more just because of their position?
- mars4rp 7y agoI go a level deeper, does any person working in the same company deserve 1000x more compensation than average worker?
- vonholstein 7y agoLogically, shouldn't the compensation for a worker be a function of both leverage and risk? CEOs have enormous leverage to affect change in their company, with proportionate increase in company returns. An average worker or even an excellent one has fewer opportunities, and even then influence is usually limited to a single team or product. An example of leverage would be, investing $x million in product line x instead of y. While anyone theoretically can make this decision, the larger $x is the more you want someone owning this who has made these type of decisions before. Which requires someone who has progressively taken more risks in their career and made the right calls.
- Kaveren 7y agoIt is completely possible to be worth 1,000x more than the average worker in your company. Just because many (if not most) CEOs don't deserve this doesn't at all, does not mean that you can definitively say that nobody does. Really awful rhetoric (from anti-capitalists) I hear is that nobody works 1,000x times as long or as hard as the average worker. Value is not manifested in how long or how hard you work. I think it's part of a wider worldview that doesn't believe that talent is very impactful, and in favor of cooperation rather than competition.
- jachee 7y agoTalent is merely applied luck.
- Kaveren 7y agoI don't know how you can possibly believe this. Do you really believe that Terry Tao got lucky, and just worked way harder than everyone else? Same can be applied to business executives.
- jachee 7y agoSure. His luck started by being born to a pediatrician and a math/physics teacher, rather than—say a couple of itenerant agricultural workers.
- Kaveren 7y agoAnd yet there are so many more people who came from as fortunate or more fortunate means, including those who went into mathematics, but are not as talented as them. Michael Phelps is not just a product of luck, either. You could train your entire life and not be as good a swimmer as him. You'd have to redefine luck to include genetics.
- jachee 7y agoGenetics are 100% luck. You can't choose your parents.
- rootusrootus 7y agoThe question isn't really whether the CEO provides more than 1000x the value of the average worker, though, it more like how much value does he provide compared to someone else in the same position, and how much does skill matter. If I offered a successful senior manager with an MBA, say, $500K to take the CEO role, would he statistically do worse than a CEO I hire from outside at $10M? With such a wide disparity in compensation, it sure feels a lot more like a club than any kind of meritocracy.
- Aunche 7y agoJK Rowling sold hundreds of millions of books. Like every other author, she made a few dollars a book. It's completely fair that she is a billionaire. You can say the same thing about CEOs. Jeff Bezos had a part of play in every Amazon package shipped. Virtually every phone in the world was inspired by the designs of Steve Jobs.
- charlesdm 7y agoThe short answer to that question is yes. A good CEO will invest $200 million in a good asset (i.e. factory), resulting in a great return for the organisation. A bad CEO will invest $200 million in a bad asset (i.e. Tumblr, $1.1bn -> $3m) and lose their shirt. Say the decision of the good CEO makes the company $100m. How much is he worth? A lot.
- devoply 7y agoYou invest in assets using tools like NPV. CEOs don't have crystal balls. Some might have a gut instinct, but then they are no different than your gambling stock trader... who might be up today and down tomorrow. It's a function of luck, not a function of ability. You have founders like Stuart Butterfield who can claim over 2-3 successes to make products worth billions. I doubt most CEOs could do the same thing.
- charlesdm 7y agoYou're basically saying good investors don't exist and everything is priced to perfection? This could range from investing in equipment, to expanding in a new business line, to acquiring a competitor and realising synergies that someone else would not have noticed. Putting 1 and 1 together in specific business focus areas might result in 3 for the well trained eye or the smart mind. Plenty of people are good at investing (understanding how it all ties together, and understanding how they take risk) outside of the public markets. And plenty are horrible (i.e. mom and pop investing in the mutual funds of your bank).
- rootusrootus 7y ago> saying good investors don't exist I am probably misremembering many key details here, but didn't Bogle make a pretty good case for this?
- RobertDeNiro 7y agoSounds like it should be entirely commission based ? I don't think anyone sees an issue if you get a share of the amount you generated, but getting large salary without having achieved anything seems a bit unreasonable.
- simplecomplex 7y agoNobody deserves anything. CEOs get paid because they negotiated the pay and people are willing to pay them that. That’s a fact not an economic theory.
- devoply 7y agoBorn with a golden spoon into a community willing to pay for their status.
- charlesdm 7y agoClearly not someone who thinks in terms of value creation. If I can add $20m of profit to the bottom line of an organisation, then there is nothing wrong with capturing some of that value, no? Call it CEO or entrepreneur, at the end of the day, it's the same job, with the same end result.
- Catsandkites 7y agoOver my total career I have probably helped safe guard millions upon millions of dollars. How much value did that create or protect? How much of that was I allowed to capture compared to the CEO? A fraction.
- dv_dt 7y agoSort of like if the serfs consent by not revolting, then the aristocrats must have a mandate to rule?
- doubleunplussed 7y agoSort of. I forget where I read it, but some rich guy wrote an article along the lines of "hey other rich guys, we gotta deal with this inequality thing, otherwise the pitchforks are coming for us"
- dv_dt 7y ago
- Trias11 7y agoIn business you don't get what you deserve. You get what you negotiate.
- dcolkitt 7y agoI think a lot of people get hung up on the idea that income is equivalent to dessert. Prices have nothing to do with who "deserves" what. They are merely a way to allow markets to clear supply and demand. This includes salaries, which after all are just the price of labor. Let's take the human element out of it. Do diamond "deserve" to be a million times more expensive than water? Water's essential for life, whereas diamonds are just decorations. Yet what would happen if we mandated that water must be priced higher than diamonds? It would wreak havoc. At the end of the day, markets are a social technology. The only one that humans have for effective large-scale coordination of economic activity. It would be great if there was a functional alternative system, but it simply doesn't exist. The enormous increases in material living standards that humanity has experienced over the past 200 years is only possible because we let markets determine supply and demand. (With a caveat for trained economists to design targeted interventions concerning well-studied and classified examples of market failures.) If you're concerned about inequality, the correct way to deal with it is with a robust welfare state and economist-designed redistribution schemes. Let markets decide price, and balance supply and demand. Then fix it on the backend with a welfare state. Don't mess with the machinery that literally feeds us.
- doubleunplussed 7y agoIt's very frustrating that less distortionary, plain old redistribution is so much less politically palatable than corporate welfare and random subsidies and taxes. I want a wealth tax funding a UBI, tuned to whatever level is necessary to stop inequality from growing, and for markets to do the rest. (There are market failures that benefit from government intervention too, but I'm just talking about the plan to address inequality, which has no reason to pick on specific industries or practices)
- paulgb 7y agoThis is sometimes called the Lake Wobegon effect. The idea is that the pay of a CEO compared to their peers is a signal of the quality of a CEO, so everyone wants to pay their CEO above average, creating a vicious cycle of upward CEO salaries. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=966332 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=966332 I'm not sure how true it is, but the game theory makes sense to me. The alternative, that CEOs are correctly priced by the market but that correct price has grown by 10x in half a century, actually seems less believable to me.
- leetcrew 7y agothere's a third alternative: CEOs are currently priced by the market but were underpriced in 1978. not sure I believe that, but it's a possibility.
- knodi123 7y ago> This is sometimes called the Lake Wobegon effect. Due to a humorous quote from Garrison Keillor's Prairie Home Companion show: "Well, that's the news from Lake Wobegon, where all the women are strong, all the men are good-looking, and all the children are above average."
- imtringued 7y agoIt is possible that we now have bigger companies that can afford to pay their CEOs more.
- dv_dt 7y agoAlso note that the board is very often composed of current/past/future CEOs of other companies.
- charlesdm 7y agoAnd generally the shareholder(s).. ?
- dv_dt 7y agoOn the board? Not really unless they're activist investors with some substantial slice of the total shares. The vast majority of shareholders do not actively participate in the compensation decisions of the CEO except perhaps at an essentially superficial approval of the compensation package. At best one might say a vote against would be to sell the shares, but if public companies broadly all overcompensate their CEOs then it's this tension between leaving most of the market or investing in companies that might make money despite overpaying.
- methodover 7y agoWe should require employee representation on Board of Directors. Germany requires half the board to be represented by the company's employees: https://en.wikipedia.org/wiki/Codetermination_in_Germany https://en.wikipedia.org/wiki/Codetermination_in_Germany I believe German CEOs typically make around 1/3rd of what American CEOs make (having trouble finding the source on that, but that's the number I've seen cited before), possibly in part due to these laws.
- zajio1am 7y agoNote that there is a difference in corporate management between USA and many european countries, where there is two boards: https://en.wikipedia.org/wiki/Dual_board https://en.wikipedia.org/wiki/Dual_board The requirement for half representatives for company's employees is for (secondary) supervisory board of directors, not for (primary) management board.
- 7y ago
- deelowe 7y agoIs this all simply the side effect of having transparent pay for executives? If worker pay was similarly transparent, if companies were required to post pay ranges on all job postings, we would see a similar pattern?
- axaxs 7y agoThis, while potentially true, is ridiculous. I'm just going to pick a big company, ATT (I have no services or interactions with this company). If they believe in this effect of paying more to get the best, then why not the workers? Would not paying more for better workers ensure better end results? I want my cell towers and fiber being serviced and programmed by the best, after-all. Oh what's that, they don't give two shits about hiring the best, and just want it done cheaply? Seems a one way street to me...