3 ms·

The risk and reward of hiring the wrong CEO is way, way higher than a single engineer. Combine that with supply and demand to try and hire the best exec, and it

by nvarsj 7y ago

The risk and reward of hiring the wrong CEO is way, way higher than a single engineer. Combine that with supply and demand to try and hire the best exec, and it's not hard to see why exec comp can get very high. It might not feel "fair" but this is capitalism and the market pays for value not how hard you toil in the field. > should they have almost complete financial and reputational immunity for their "bad" actions and decisions? (unlike regular staff) Do they? Bad execs should be fired by the company's board. If the board is not doing a good job there, the business is bound to fail spectacularly. Also, execs at public companies tend to be public officers - their reputation is very much on public display. They are taking a big risk personally compared to a typical staff member. Maybe not so much financially - but they are employees, not founders.

ryandrake 7y ago
Can you elaborate on the risk you think they are taking? If they lose their job, well, they spend a little quality time with their money then move on to some other multimillion dollar job. They were a senior executive at one company so they can go be a senior exec at any other company. If I get fired, I panic as I blow through my savings and take whatever job I can get. I find that scenario to be a lot more of a risk.
MereInterest 7y ago
> They are taking a big risk personally compared to a typical staff member. Negative effect of a failed CEO: $25M in severance pay [1]. Roughly 10-12 times the lifetime earnings of a college graduate [2]. When the cost of failure is to have enough income to live very comfortable for the rest of their lives, that is not a large cost. Negative effect on employees: needing to find a new job, move to a new location, start a new social life, and that is all assuming that there is the recommended 3-6 month emergency fund. When 40% of US adults would be underwater from an unexpected $400 bill [3], this adds debt and uncertainty to be able to start up again. [1] https://www.beckershospitalreview.com/compensation-issues/healthcare-ceos-see-25m-golden-parachute-on-average-5-things-to-know.html https://www.beckershospitalreview.com/compensation-issues/he... [2] https://www.ssa.gov/policy/docs/research-summaries/education-earnings.html https://www.ssa.gov/policy/docs/research-summaries/education... [3] https://www.fool.com/retirement/2018/05/23/guess-how-many-americans-couldnt-cover-a-400-emerg.aspx https://www.fool.com/retirement/2018/05/23/guess-how-many-am...
- nvarsj 7y ago
  I didn't mean financial risk. As a public officer, you are taking risk in terms of your public reputation and legal responsibilities. That does factor into the comp - in fact, it is fairly common in certain highly regulated industries for the CEO's entire role to just to take the burden of liability.
  - justinjlynn 7y ago
    So, how many banking executives were found criminally liable after, say, the 2008 global financial crisis?
    - rjf72 7y ago
      In places such as Iceland, where bankers have not 'integrated' so deeply with the government, the banks were allowed to crash and top executives served years in prison. [1] This included people all the way up to chairmen. It had a catastrophic short term impact, but Iceland's economy rapidly recovered and remains healthy to this day. Incidentally their current president has an approval rating upwards of 90%. Obama in 2009 was optically in conflict with bankers. Quoting things such as "I did not run for office to be helping out a bunch of fat cat bankers on Wall Street" [2]. 8 years later, he's getting paid $400k for 30 minute talks by them, repeatedly. For some reason banks and investors don't seem so anxious to turn Icelandic presidents into multimillionaires for a few hours of talking once they leave office. [1] - https://www.independent.co.uk/news/world/europe/iceland-to-sentence-ninth-banker-found-guilty-of-market-manipulation-that-helped-cause-2008-a7349711.html https://www.independent.co.uk/news/world/europe/iceland-to-s... [2] - https://www.reuters.com/article/us-financial-regulation-obama-idUSTRE5BA4IF20091211 https://www.reuters.com/article/us-financial-regulation-obam...
analog31 7y ago
Economically, risk is impact times probability. If there are more than just a few companies that are reasonably comparable to one another, then it should be possible to quantify an executive's risk by looking at the past performance of similar executives. An executive can, and should, arrange matters so that they come out ahead of the average worker even if they fail at their jobs. In that case, their risk is still lower than the average worker's. Maybe they take some kind of big psychological risk? I doubt it. I'll bet that they are as rational about their jobs as we are about ours, and they see it as a pure transaction with no emotional attachments.
- ethbro 7y ago
  I don't think parent is talking about risk to the executive, but rather risk to the company. Or to put it another way, executive compensation must be order of magnitude comparable with potential personal gratification should the executive act in their own (and not the company's) best interests. Paying an executive less than that is asking someone to make a suboptimal personal choice. And while you may find people willing to do that (because ethics), you won't reliably always find good people who make that sacrifice.
  - analog31 7y ago
    To me, this sounds like general purpose wage competition. I mean, even doing my own job for much less than the going rate would be a suboptimal personal choice, a sacrifice, etc. My wage level is enough to ensure that acting in the company's interest is also in my personal interest. In fact, every player who is involved with the company (workers, suppliers, shareholders, customers, etc.) is assumed to be acting out of self interest. What management does is to arrange matters so that self interest coincides with a unified interest that is the business entity.

by nvarsj 7y ago

ryandrake 7y ago

Can you elaborate on the risk you think they are taking? If they lose their job, well, they spend a little quality time with their money then move on to some other multimillion dollar job. They were a senior executive at one company so they can go be a senior exec at any other company. If I get fired, I panic as I blow through my savings and take whatever job I can get. I find that scenario to be a lot more of a risk.

MereInterest 7y ago

> They are taking a big risk personally compared to a typical staff member. Negative effect of a failed CEO: $25M in severance pay [1]. Roughly 10-12 times the lifetime earnings of a college graduate [2]. When the cost of failure is to have enough income to live very comfortable for the rest of their lives, that is not a large cost. Negative effect on employees: needing to find a new job, move to a new location, start a new social life, and that is all assuming that there is the recommended 3-6 month emergency fund. When 40% of US adults would be underwater from an unexpected $400 bill [3], this adds debt and uncertainty to be able to start up again. [1] https://www.beckershospitalreview.com/compensation-issues/healthcare-ceos-see-25m-golden-parachute-on-average-5-things-to-know.html https://www.beckershospitalreview.com/compensation-issues/he... [2] https://www.ssa.gov/policy/docs/research-summaries/education-earnings.html https://www.ssa.gov/policy/docs/research-summaries/education... [3] https://www.fool.com/retirement/2018/05/23/guess-how-many-americans-couldnt-cover-a-400-emerg.aspx https://www.fool.com/retirement/2018/05/23/guess-how-many-am...

nvarsj 7y ago
I didn't mean financial risk. As a public officer, you are taking risk in terms of your public reputation and legal responsibilities. That does factor into the comp - in fact, it is fairly common in certain highly regulated industries for the CEO's entire role to just to take the burden of liability.
- justinjlynn 7y ago
  So, how many banking executives were found criminally liable after, say, the 2008 global financial crisis?
  - rjf72 7y ago
    In places such as Iceland, where bankers have not 'integrated' so deeply with the government, the banks were allowed to crash and top executives served years in prison. [1] This included people all the way up to chairmen. It had a catastrophic short term impact, but Iceland's economy rapidly recovered and remains healthy to this day. Incidentally their current president has an approval rating upwards of 90%. Obama in 2009 was optically in conflict with bankers. Quoting things such as "I did not run for office to be helping out a bunch of fat cat bankers on Wall Street" [2]. 8 years later, he's getting paid $400k for 30 minute talks by them, repeatedly. For some reason banks and investors don't seem so anxious to turn Icelandic presidents into multimillionaires for a few hours of talking once they leave office. [1] - https://www.independent.co.uk/news/world/europe/iceland-to-sentence-ninth-banker-found-guilty-of-market-manipulation-that-helped-cause-2008-a7349711.html https://www.independent.co.uk/news/world/europe/iceland-to-s... [2] - https://www.reuters.com/article/us-financial-regulation-obama-idUSTRE5BA4IF20091211 https://www.reuters.com/article/us-financial-regulation-obam...

analog31 7y ago

Economically, risk is impact times probability. If there are more than just a few companies that are reasonably comparable to one another, then it should be possible to quantify an executive's risk by looking at the past performance of similar executives. An executive can, and should, arrange matters so that they come out ahead of the average worker even if they fail at their jobs. In that case, their risk is still lower than the average worker's. Maybe they take some kind of big psychological risk? I doubt it. I'll bet that they are as rational about their jobs as we are about ours, and they see it as a pure transaction with no emotional attachments.

ethbro 7y ago
I don't think parent is talking about risk to the executive, but rather risk to the company. Or to put it another way, executive compensation must be order of magnitude comparable with potential personal gratification should the executive act in their own (and not the company's) best interests. Paying an executive less than that is asking someone to make a suboptimal personal choice. And while you may find people willing to do that (because ethics), you won't reliably always find good people who make that sacrifice.
- analog31 7y ago
  To me, this sounds like general purpose wage competition. I mean, even doing my own job for much less than the going rate would be a suboptimal personal choice, a sacrifice, etc. My wage level is enough to ensure that acting in the company's interest is also in my personal interest. In fact, every player who is involved with the company (workers, suppliers, shareholders, customers, etc.) is assumed to be acting out of self interest. What management does is to arrange matters so that self interest coincides with a unified interest that is the business entity.