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Strangely, an explanation for the increased number of wealths coming from new, tech companies and investments that is ignored in his post is the disturbing fact

Strangely, an explanation for the increased number of wealths coming from new, tech companies and investments that is ignored in his post is the disturbing fact it was taken from the average employee cut of the profits. See this: 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-... I quote: "The 2017 CEO-to-worker compensation ratio of 312-to-1 was far greater than the 20-to-1 ratio in 1965, and more than five times greater than the 58-to-1 ratio in 1989"

missedthecue 6y ago
I hate this comparison. Stock based compensation didn't exist in 1965. It's an oranges to apples comparison. CEO salaries today are still about 20-1, depending on the business. For instance: - Doug McMillon of Walmart makes $1.2 million in salary. - James Quincy of Coca-Cola makes $1.5 million in salary. - JPMorgan's CEO Jamie Dimon has a $1.5 million salary. - Sundar Pichai of Google makes $2 million in salary. You only get 312-1 by adding in performance based stock and incentive alignment options. But these don't come from the cashflow of the business like wages and salary. They come from diluting Wall Street. Knowing this, the whole thing is way less of an outrage. The comparison is so uneducated. If there is outrage over CEO pay, it doesn't make sense to come from the unions or left politicians, it should be coming from activist hedge fund billionaires, which it does. Carl Icahn for example is wildly against this level of CEO compensation because it dilutes his ownership. John Doe on his forklift stacking pallets in the Coca Cola factory is not made poorer over excessive CEO pay. Carl Icahn is.
- JMTQp8lwXL 6y ago
  A more useful longterm metric is total compensation CEO:worker ratio. Stating the salary ratios are the same isn't a compelling argument since that's only one factor in the total package.
- peter422 6y ago
  Why can’t employee compensation also come from diluting Wall Street? Why do they vast majority of those benefits go to top executives?
  - missedthecue 6y ago
    Performance and incentive alignment. John Doe stacking pallets at the Coca Cola factory really won't produce much better top or bottom line results for the business if you offer him a stock bonus. His forklift only drives so fast, and he plays a very minute part in the direction of the business. The CEO on the other hand can have a huge impact, and it's why shareholders choose and vote on certain incentives and bonuses. But more importantly, in other businesses this type of comp is certainly offered. If you work in a small startup in any position, you probably get stock options, because your performance on a 10 or 20 person team probably does have real noticeable and measurable impact on the business's success.
    - alpha_squared 6y ago
      > John Doe stacking pallets at the Coca Cola factory really won't produce much better top or bottom line results for the business if you offer him a stock bonus. His forklift only drives so fast. A counter-perspective would be that John Doe becomes incentivized to improve efficiency and innovate in the process. People are not machines or primitive animals. Humans are capable of creative problem-solving. Note: stock options are not stocks. You're not given a share in the company, you're given the opportunity to invest in the company. You have to put money in to _potentially_ get money back.
      - djrogers 6y ago
        > Note: stock options are not stocks. You're not given a share in the company, you're given the opportunity to invest in the company. You have to put money in to _potentially_ get money back. While pedantically true, in reality this is generally not the case. As long as you are still employed by the company that granted you the options, you do not have to exercise them ('invest') until you wish to sell them. What this means in practice is that nary a single dollar ever comes out of your pocket.
- khuey 6y ago
  I don't think "upper management comp has exploded only because they invented an entirely new way of compensating themselves" is the get-out-of-jail-free card you seem to think it is.
- joshuamorton 6y ago
  > They come from diluting Wall Street. Yes, until the company offers a stock buyback (which these companies collectively spent more than 50 billion on in 2020)
  - missedthecue 6y ago
    ok. But then they're using cash from the business to get the share count back down to prior levels, and it's still a net loss for Icahn. There are only 100 percents. If the management team gets more ownership through dilution, it means Carl Icahn owns less.
    - shkkmo 6y ago
      Yes, and that cash is a part of the revenue that could be used to pay the workers who generated that revenue. Thus CEO pay is absolutely the concern of workers, unions, and union supported politicians.
    - joshuamorton 6y ago
      But the employees don't gain anything. You've modeled this is a fight between wall street and the CEO, entirely forgetting about employees who get no (or trivial) stock compensation. Hypothetically, a company could pay 100M in stock to the CEO, and then issue 100M in stock buybacks to the CEO. This is functionally equivalent to paying the CEO 100M, but it wouldn't count in your salary numbers. And notably, both of these, stock buybacks and CEO pay, dilute wallstreet in the same way. But neither benefits employees. To use the JP morgan example, (and this is roughly equivalent for Google), the company could stop stock buybacks, and instead pay every employee an additional $150,000. That results in the CEO and wall street getting less money, and employees getting more. Walmart and Coke modulate the share price in other ways, so stock buybacks won't tell a particularly interesting story.
- alpha_squared 6y ago
  You're not wrong, but the perspective feels like missing the forest for the trees. So what if stock-based compensation was uncommon in 1965? The average employee doesn't get to benefit from the very real contributions they've made to the company, while the CEO does benefit. Why didn't employee profit-sharing increase at the same rate as non-salary compensation did for CEOs? That's still relevant. Additionally, your comment leaves out the golden parachute CEOs often have, which is orders of magnitude greater than most severance packages, if there's even a severance package in place. Financially, it's pretty hard to fail as a CEO of just about any public company; even in failure, you profit considerably.
  - davvolun 6y ago
    Exactly, pensions were considerably more common in the 1960s also, but at the end of the day, I don't really care if my retirement is actually funded by a pension or a 401k or by stuffing dollar bills under my mattress, I want to know when I can retire and how comfortably I can live when I retire. Yes, getting into the weeds is valuable, but here we're talking about the money in your bank at the end of the day, and that CEO salaries haven't changed much doesn't say anything. Yes, a CEO should be making more money than the average employee. The debate is over how much -- why do CEOs get absolutely massive bonuses and golden parachutes and stock options and for employees it's expected that you put in the work in the hope of future recompense in terms of bonuses, promotions, etc.
    - WalterBright 6y ago
      > why Because their decisions can drive a company into bankruptcy or transform it into a trillion dollar company. Your average line employee has no such leverage from their actions.
      - FireBeyond 6y ago
        And when they drive it into bankruptcy, the company will still go to court to argue that these bonuses, compensation, parachutes should be paid, regardless. Win-win game. Except for the employees and shareholders.
- efficax 6y ago
  stock based compensation exists for C-level employees because it allows them to reduce their tax burden by taking their income via long term capital gains. It's still income!
  - systemBuilder 6y ago
    I think that only works for ISOs (incentive stock options), and now the rules on who can get them and how many can be issued are very restrictive.
- Florin_Andrei 6y ago
  TLDR: CEOs are wildly better paid nowadays, compared to decades ago, via mechanism X, as opposed to mechanism Y. Both X and Y ultimately deliver money.
  - missedthecue 6y ago
    And the question is whether that's a problem or not, and if so, who is it a problem for. My comment illustrates that modern CEO pay does not hurt the average employee in any way, only the shareholders. Either you don't think modern CEO pay is a problem, or you think it's a problem because it makes shareholders poorer. It doesn't impact the rest of the employees or reduce their incomes.
    - wavefunction 6y ago
      I find the notion that paying a CEO 321 times the salary of a worker in cash to be problematic for society while paying the CEO 321 the salary of a worker in stock options/grants is not not problematic to society to be completely unconvincing. Both illustrate to me the historic and increasing inequality in distribution of income and wealth. Asking me to ignore that divide and instead sympathize with someone like Carl Icahn is obscene in a humorous way.
      - missedthecue 6y ago
        Why is it a problem then? Your personal intuitions about how much any human should earn in a given year sounds less like a convincing argument to me and more like envy.
        Florin_Andrei 6y ago
        > Why is it a problem then? I honestly think the Ayn Rand crowd are missing a few circuits. Well, that's a crude way of putting it, but let's just say it's like color blindness but for ethics. No amount of oratory will make a color-blind person see red. And that's just the way it is. Those "circuits" play an important role in regulating how groups behave. Lacking them, you open the door for extremely bad things to happen. This is why libertarianism and related ideologies should be treated with extreme caution at best.
- greatgib 6y ago
  First, when PG compare wealth of rich persons, he does not just compare salaries but the total wealth that come from the total of incomes. Second, there is something not to forget about the stocks: It is a "right" to the proportional part of all the future financial results of the company. . So, let's forget about inflation and consider equivalent dollars: Imagine you have a 30 employees company, that will generate 1000$ of income. Of these 1000$, there is a 50% margin, so it remains 500$ of benefit. . In 1965: - Boss will have a salary of 200$ - 30 employees total wages of 300$ (so 10$ per person) - Net result of 0$ (total of stocks, going to the boss anyway) . In 2017, same company and conditions: - Boss will have a salary of 50$ - 30 employees total wages of 19,23$ (so 0,64$ per person) - Net result of 430,77$ The net result belongs to Boss + other shareholders. -> boss get: 150$ -> other shareholders get: 280,77$ (So in result 200$ for the boss, 0,64$ per employee, 312-1 ratio) . Some people will say that the stocks value, based on valuation, does not correspond to 1 year of revenue. So, for example a 100$ stocks might correspond to an expectation of 10 years of 10$ benefit. But, on the previous article the 312-1 ratio corresponds to a year compensation, that is repeated every year. So it means that as a boss, you will also get new stocks or bigger capital for your stock every year to have this ratio maintained.
- markvdb 6y ago
  > If there is outrage over CEO pay, it doesn't make sense to come from the unions or left politicians, it should be coming from activist hedge fund billionaires, which it does. One doesn't have to be a shareholder or even a direct stakeholder in a specific company to claim the right to outrage over this growing inequality in pay.
  - missedthecue 6y ago
    The question is whether anyone is worse off because of it, and my comment points out that contrary to popular rhetoric, if anyone is getting hurt by it, it's not the employees. If you think nobody is getting hurt by it, it's not a problem, it's just envy.
    - markvdb 6y ago
      It's certainly possible to view these things from other perspectives than a narrow transactional economic perspective. Can you imagine some of those?
      - missedthecue 6y ago
        Yes, jealousy and envy that other people do in fact make more money than I do. This is not a real societal problem, it's a personal and human nature problem.
- jjav 6y ago
  > CEO salaries today are still about 20-1 Base salaries are not significant to the discussion. Sometime high profile CEOs make $1 salary. What matters it the total comp, just as with any employee. Some FAANG engineers might make $175K in base salary but total comp is over 1M.
- jjav 6y ago
  > They come from diluting Wall Street. Knowing this, the whole thing is way less of an outrage. The outrage is why all that dilution goes to the CEO. Options can be granted to all employees more fairly than common these days.
- heavyset_go 6y ago
  This analysis is about as apt as saying, "Larry Ellison's salary was only $1, so what are you complaining about?"
  - missedthecue 6y ago
    The guardian article and the commenter I replied to are pointing out the difference between 1965 and 2020 as if it's a problem. A problem is defined as something that has a negative impact on people. My analysis points out that the only people that modern CEO pay has a negative impact on is the shareholders. I illustrated that it makes literally no difference to your average floor worker whether the CEO gets $0 or $20 million in stock comp.
    - lanstin 6y ago
      If that worker has a pension or 401k, then it does matter. The fleecing isn't directly from him, but aggregate it by "managerial class" and "middle class" and you see the high $ managerial cash flows are directly at the expense of the middle class and retirement of the middle class. Thru in some tax policy, and you can see it is also taking money away from education of young middle class folks, and investment in communal things like roads and public health and so on.
      - missedthecue 6y ago
        Yes, it hurts shareholders. That's what I wrote in my first comment. You agree with me then?
        lanstin 6y ago
        I agree it's a diversion of wealth from the workers to the management class.
    - CPLX 6y ago
      This argument is fucking ludicrous. Money is money. If the business used to have it and now the CEO has it then the business gave it to him. There's no class of equity that wasn't originally created and owned by the business so that's where the money comes from. And lest there be any confusion, all the companies we're talking about do massive stock buy backs so it's not even hypothetical, they spend billions of dollars to prop up the price of stocks and the executives get it.
- fshbbdssbbgdd 6y ago
  > But these don't come from the cashflow of the business like wages and salary. They come from diluting Wall Street. This distinction doesn’t make sense. Cash and stock are fungible for a public company.
  - diogofranco 6y ago
    This, many companies even make this quite explicit by issuing stock to employees and buying back the same number of shares, in order to pay with cash flow rather than dilution.
- bumby 6y ago
  And in that context, the article does speak to this point. >the companies themselves are more valuable, because newly founded companies grow faster than they used to. The added reliance on stock-based compensation combined with higher valuations leads to higher CEO salaries. This isn't making a case one way or the other about whether this is a fair or sustainable model, just meant to bolster your point about why greater context is needed when discussing executive salaries as a multiple of the individual employee.
- amalcon 6y ago
  > But these don't come from the cashflow of the business like wages and salary. They come from diluting Wall Street. How are these different? If the business pays its employees $X more, that money doesn't just appear out of nowhere. It comes out of other areas of the business -- such as capex, M&A, or retained profits. All of these things contribute directly to the value of the shares held by Wall Street, whether directly (in the case of a dividend or share buyback) or indirectly by growing the business. Likewise, dilution means that an existing shareholder benefits less from $X worth of these things, and therefore should demand an increase in X (or a reduced stock price). It's all money either way, and money is fungible.
- confidantlake 6y ago
  This distinction seems meaningless. At the end of the day, the stockholders own the business. They are paying the salaries of both the CEO and the pallet worker, regardless if it comes in the form of cash or stock. Also wages don't always come from cashflow. Amazon lost money for its first X years. Salaries and everything else were covered by investor cash.
- royaltjames 6y ago
  Salary isn't How People Get Rich Now, seems like you missedthecue.
- WalterBright 6y ago
  > Stock based compensation didn't exist in 1965. In 1965 employees also typically got pensions, the value of which is not counted in those figures.
- fredophile 6y ago
  What does "diluting wall street" mean? How is it different from "taking money from the business owners"? If I'm CEO at a company what difference does it make to me if I'm compensated by salary or shares/bonuses? If I'm an employee at a company what difference does it make to me if the CEO is compensated by salary or shares/bonus3s? If I'm a shareholder in a company what difference does it make to me if the CEO is compensated by salary or shares/bonuses? The distinction between salary and bonus compensation is irrelevant outside of possibly some minor tax impacts.
- CPLX 6y ago
  This is nonsense. What you clearly have here is a principal/agent problem. The way it works is like this: 1) Money is invested in companies by a diffuse set of investors. That diffuse group is unified by people responsible for managing money. 2) They invest it with the intention of having it go into the productive activities of a business, such as staff and plant and equipment or technology or software or marketing. That money when received by the business is managed by the company management. 3) What is actually happening is that each of these gatekeepers is taking as much as they can get away with. It really isn't all that much more complicated than that. They'll concoct increasingly complex rationalizations and call it "performance" and launch decades of public relations (like the article we're all commenting on) but at the end of the day the people who should be tasked with fairly apportioning resources in a common enterprise are taking more and more of it for themselves. The solution is to stop letting them get away with it.
- foobiekr 6y ago
  I'm not going to name companies, but I think this is actually not quite right. While I agree with your broader point, in a lot of larger legacy companies the heavy use of buybacks to buoy the stock price, which in turn benefits executing compensation, directly plays into whether that cash is available to use for employee compensation.
gip 6y ago
Exactly. And I also think looking at money only may not go far enough. At the end of the day what matters is the amount of resources that the society allow a person to enjoy during her/his life, from food to home ownership to work opportunities, to access to vaccine. It's pretty clear that a new class of people (founders, VCs and people close to them) are capturing a larger part of the resources today while the majority gets a decreasing share of that. And we should all be working at finding way to reverse that trend.
- WalterBright 6y ago
  They're creating the value, not taking it from others.
  - gip 6y ago
    What you are missing is that the resources in the world that matter are bounded. So if a minority is creating most of the value at scale, they will be able to redirect most of the resources to themselves. This drives the increase in inequality. That is why thinking purely in financial terms is misleading. It's not because everyone has more $$$ in the bank that everyone is better off.
    - shuckles 6y ago
      Is it really the case that Jeff Bezos is consuming a million times more finite resources than someone whose net worth is $100k? It seems to me like what you buy with virtually infinite money is status like hanging out or sleeping with celebrities, a seat in important rooms, and assets. There is only so much additional jet fuel and human labor a multi-billionaire can consume.
      - WalterBright 6y ago
        SpaceX, etc. That's what you do with billions to spend.
        6y ago
crazygringo 6y ago
> taken from the average employee cut of the profits There's never been any such thing. In the US, salaries have always been determined by the supply and demand of skills, they've never been linked to profitability or some share of it. And stock options and stock grants are relatively new (not really a thing in 1960), so if anything the actual employee share of profits -- since the value of stock is future profits discounted -- has gone up. The idea that CEO compensation is somehow "at the expense of" employee compensation is a pure myth. If CEO's were paid less, the extra money would flow to shareholders, not employees.
- lanstin 6y ago
  And the shareholders are often held by pension or 401k funds for the employee retirements. Certainly in aggregate, and all the companies have seemed to decide that this fleecing is a good thing all at once.
ikeboy 6y ago
The companies are much bigger today. If you run a company that's 10 times as big, why is it surprising that you're getting 10 times the compensation? You'd need to compare to similarly sized companies today. Instead, they look at the top 350 companies now and then.
- extra88 6y ago
  The workers that produce 10 times as much today (because of newer technologies, techniques, etc.) don't get paid 10 times as much. Worker productivity has continued to climb, decade after decade, but inflation-adjusted worker pay is basically flat over the same time period.
  - ikeboy 6y ago
    This is a myth, and if you look into the statistics of the people pushing this Big Lie, you'll find that they cheat and use different inflation metrics for productivity and for compensation.
    - jason0597 6y ago
      Can you show us these Big Lie statistics? Can you post a link or two for further reading?
      - extra88 6y ago
        They probably won't deliver but I will. Here's a top hit "The Productivity–Pay Gap" [0], what I was talking about, from the Economic Policy Institute, a pro-worker, left-leaning think tank [1]. The top google hit for the "myth" is "Debunking a Myth in 1 Chart: Wage & Productivity Growth" [2] from the American Action Forum, a conservative think tank affiliated with a conservative, Republican advocacy group [3]. Basically it claims the original report compared data that aren't comparable. There's also "Why the gap between worker pay and productivity might be a myth" [4] from the American Enterprise Institute, a conservative think tank [5]. I didn't read them closely but part of the methodology in the AEI article used salary and benefits instead of just salary to draw a compensation line closer to productivity. Given that health care is such a huge part of the cost of those benefits, maybe the claim should be that company shareholders are sharing the wealth with workers but that health care costs are so out of control it's eating up all the workers' gains. EPI response to criticisms, "Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay" [6]. [0] https://www.epi.org/productivity-pay-gap/ https://www.epi.org/productivity-pay-gap/ [1] https://en.wikipedia.org/wiki/Economic_Policy_Institute https://en.wikipedia.org/wiki/Economic_Policy_Institute [2] https://www.americanactionforum.org/insight/debunking-a-myth-in-1-chart-wage-productivity-growth/ https://www.americanactionforum.org/insight/debunking-a-myth... [3] https://en.wikipedia.org/wiki/American_Action_Network https://en.wikipedia.org/wiki/American_Action_Network [4] https://www.aei.org/economics/political-economy/the-decline-of-unions-didnt-cause-the-growing-gap-between-pay-and-productivity-which-may-not-be-happening-either-study/ https://www.aei.org/economics/political-economy/the-decline-... [5] https://en.wikipedia.org/wiki/American_Enterprise_Institute https://en.wikipedia.org/wiki/American_Enterprise_Institute [6] https://www.epi.org/publication/understanding-the-historic-divergence-between-productivity-and-a-typical-workers-pay-why-it-matters-and-why-its-real/ https://www.epi.org/publication/understanding-the-historic-d...
fallingfrog 6y ago
Yeah much of the innovation has been in ways to elude labor laws (Uber) or ways to get rid of labor unions (moving production to China) or ways to hack tax laws (stock buybacks, shell companies, always showing zero profit on the balance sheet). That’s where the profit comes from.
Aerroon 6y ago
Imagine looking at the 5 deadliest plane crashes in 1970 and comparing them to the 5 deadliest plane crashes in 2010. You find that more people died in these crashes in 2010 than 1970. You wouldn't conclude that air travel is now less safe than in the 70s, would you? There was a lot more air travel in 2010 compared to 1970. The 5 deadliest flights makes up a much smaller portion of all flights in 2010 than it did in 1970. It's a misleading comparison. You should instead look at the number of deaths per passenger or per passenger mile. You have to think of the same point when looking at the "top 350 companies in the USA in 1965 vs 2017". Are the companies the same size in 2017? Do CEOs have the same amount of responsibility in 2017? Is the complexity of managing the company the same in 2017 as it was in 1965? What percentage of all companies do these top 350 make up? These are all factors you might want to take into account when looking at a specific number of top companies. I'd be curious to know what the numbers would look like if they looked at the top 1% or top 0.1% of companies in the US instead. Or perhaps even the average and median companies. My guess is that those stats wouldn't be politically as useful. I imagine that you'd still see a growing disparity, but a smaller one.
- bumby 6y ago
  Not entirely sure why you're being downvoted but I think these are at least relevant considerations. There seems to be a lot of contradictory academic claims about CEO compensation so I thought referencing a meta-analysis would be the most useful[1]. If company size is a proxy for your complexity claim, that seems to be much more informative regarding executive pay. Actual company performance was only about 5% predictive, compared to 40% for firm size. It seems like the heuristic I've heard about the "best way to get a raise is to grow your department not necessarily grow your profit" may have a seed of truth to it. [1]https://www.researchgate.net/profile/Steve-Werner-3/publication/247569983_How_Much_Does_Performance_Matter_A_Meta-analysis_of_CEO_Pay_Studies/links/56c4febd08ae736e70471099/How-Much-Does-Performance-Matter-A-Meta-analysis-of-CEO-Pay-Studies.pdf https://www.researchgate.net/profile/Steve-Werner-3/publicat...
bhl 6y ago
With respect to tech companies, the compensation ratio is a good starter to get people to think about wealth inequality but as tool or metric for public policy, it is useless. Here's my intuition on that: - it doesn't answer how much of the wealth was created (endogenous) or taken (zero sum): tech companies can simultaneously induce new demand and preferences while replacing older companies - it doesn't answer whether the average worker or society as a whole is better or worse with a lower or higher compensation ratio, because by averaging you lose nuance; for example, are more or less people employed by tech companies now then by the companies that were replaced? are the worker salaries themselves higher or lower compared previous worker salaries? For me, higher compensation ratios in _tech_ companies is good for people in tech: tech requires less labor for inch of market cap, while that labor is compensated higher. Whether or not that's an overall good for society though, idk.
imgabe 6y ago
That doesn't have a lot to do with tech companies. First, the ratio compares CEO compensation with stock options to worker wages (without stock options), whereas many of the workers at tech companies are also getting stock options. Second, pg is talking about the Forbes 100 where the founders of tech companies are represented. The founders didn't get their stock by being granted it as compensation in stock options, they got it by virtue of founding the company. Whatever they have left, they have because that's what they were able to keep and not sell or get diluted. For example, Bezos' wealth is mostly due to the fact that he owns ~13% of Amazon. He didn't get that as CEO compensation, he got it by founding the company.

missedthecue 6y ago

I hate this comparison. Stock based compensation didn't exist in 1965. It's an oranges to apples comparison. CEO salaries today are still about 20-1, depending on the business. For instance: - Doug McMillon of Walmart makes $1.2 million in salary. - James Quincy of Coca-Cola makes $1.5 million in salary. - JPMorgan's CEO Jamie Dimon has a $1.5 million salary. - Sundar Pichai of Google makes $2 million in salary. You only get 312-1 by adding in performance based stock and incentive alignment options. But these don't come from the cashflow of the business like wages and salary. They come from diluting Wall Street. Knowing this, the whole thing is way less of an outrage. The comparison is so uneducated. If there is outrage over CEO pay, it doesn't make sense to come from the unions or left politicians, it should be coming from activist hedge fund billionaires, which it does. Carl Icahn for example is wildly against this level of CEO compensation because it dilutes his ownership. John Doe on his forklift stacking pallets in the Coca Cola factory is not made poorer over excessive CEO pay. Carl Icahn is.

JMTQp8lwXL 6y ago
A more useful longterm metric is total compensation CEO:worker ratio. Stating the salary ratios are the same isn't a compelling argument since that's only one factor in the total package.
peter422 6y ago
Why can’t employee compensation also come from diluting Wall Street? Why do they vast majority of those benefits go to top executives?
- missedthecue 6y ago
  Performance and incentive alignment. John Doe stacking pallets at the Coca Cola factory really won't produce much better top or bottom line results for the business if you offer him a stock bonus. His forklift only drives so fast, and he plays a very minute part in the direction of the business. The CEO on the other hand can have a huge impact, and it's why shareholders choose and vote on certain incentives and bonuses. But more importantly, in other businesses this type of comp is certainly offered. If you work in a small startup in any position, you probably get stock options, because your performance on a 10 or 20 person team probably does have real noticeable and measurable impact on the business's success.
  - alpha_squared 6y ago
    > John Doe stacking pallets at the Coca Cola factory really won't produce much better top or bottom line results for the business if you offer him a stock bonus. His forklift only drives so fast. A counter-perspective would be that John Doe becomes incentivized to improve efficiency and innovate in the process. People are not machines or primitive animals. Humans are capable of creative problem-solving. Note: stock options are not stocks. You're not given a share in the company, you're given the opportunity to invest in the company. You have to put money in to _potentially_ get money back.
    - djrogers 6y ago
      > Note: stock options are not stocks. You're not given a share in the company, you're given the opportunity to invest in the company. You have to put money in to _potentially_ get money back. While pedantically true, in reality this is generally not the case. As long as you are still employed by the company that granted you the options, you do not have to exercise them ('invest') until you wish to sell them. What this means in practice is that nary a single dollar ever comes out of your pocket.
khuey 6y ago
I don't think "upper management comp has exploded only because they invented an entirely new way of compensating themselves" is the get-out-of-jail-free card you seem to think it is.
joshuamorton 6y ago
> They come from diluting Wall Street. Yes, until the company offers a stock buyback (which these companies collectively spent more than 50 billion on in 2020)
- missedthecue 6y ago
  ok. But then they're using cash from the business to get the share count back down to prior levels, and it's still a net loss for Icahn. There are only 100 percents. If the management team gets more ownership through dilution, it means Carl Icahn owns less.
  - shkkmo 6y ago
    Yes, and that cash is a part of the revenue that could be used to pay the workers who generated that revenue. Thus CEO pay is absolutely the concern of workers, unions, and union supported politicians.
  - joshuamorton 6y ago
    But the employees don't gain anything. You've modeled this is a fight between wall street and the CEO, entirely forgetting about employees who get no (or trivial) stock compensation. Hypothetically, a company could pay 100M in stock to the CEO, and then issue 100M in stock buybacks to the CEO. This is functionally equivalent to paying the CEO 100M, but it wouldn't count in your salary numbers. And notably, both of these, stock buybacks and CEO pay, dilute wallstreet in the same way. But neither benefits employees. To use the JP morgan example, (and this is roughly equivalent for Google), the company could stop stock buybacks, and instead pay every employee an additional $150,000. That results in the CEO and wall street getting less money, and employees getting more. Walmart and Coke modulate the share price in other ways, so stock buybacks won't tell a particularly interesting story.
alpha_squared 6y ago
You're not wrong, but the perspective feels like missing the forest for the trees. So what if stock-based compensation was uncommon in 1965? The average employee doesn't get to benefit from the very real contributions they've made to the company, while the CEO does benefit. Why didn't employee profit-sharing increase at the same rate as non-salary compensation did for CEOs? That's still relevant. Additionally, your comment leaves out the golden parachute CEOs often have, which is orders of magnitude greater than most severance packages, if there's even a severance package in place. Financially, it's pretty hard to fail as a CEO of just about any public company; even in failure, you profit considerably.
- davvolun 6y ago
  Exactly, pensions were considerably more common in the 1960s also, but at the end of the day, I don't really care if my retirement is actually funded by a pension or a 401k or by stuffing dollar bills under my mattress, I want to know when I can retire and how comfortably I can live when I retire. Yes, getting into the weeds is valuable, but here we're talking about the money in your bank at the end of the day, and that CEO salaries haven't changed much doesn't say anything. Yes, a CEO should be making more money than the average employee. The debate is over how much -- why do CEOs get absolutely massive bonuses and golden parachutes and stock options and for employees it's expected that you put in the work in the hope of future recompense in terms of bonuses, promotions, etc.
  - WalterBright 6y ago
    > why Because their decisions can drive a company into bankruptcy or transform it into a trillion dollar company. Your average line employee has no such leverage from their actions.
    - FireBeyond 6y ago
      And when they drive it into bankruptcy, the company will still go to court to argue that these bonuses, compensation, parachutes should be paid, regardless. Win-win game. Except for the employees and shareholders.
efficax 6y ago
stock based compensation exists for C-level employees because it allows them to reduce their tax burden by taking their income via long term capital gains. It's still income!
- systemBuilder 6y ago
  I think that only works for ISOs (incentive stock options), and now the rules on who can get them and how many can be issued are very restrictive.
Florin_Andrei 6y ago
TLDR: CEOs are wildly better paid nowadays, compared to decades ago, via mechanism X, as opposed to mechanism Y. Both X and Y ultimately deliver money.
- missedthecue 6y ago
  And the question is whether that's a problem or not, and if so, who is it a problem for. My comment illustrates that modern CEO pay does not hurt the average employee in any way, only the shareholders. Either you don't think modern CEO pay is a problem, or you think it's a problem because it makes shareholders poorer. It doesn't impact the rest of the employees or reduce their incomes.
  - wavefunction 6y ago
    I find the notion that paying a CEO 321 times the salary of a worker in cash to be problematic for society while paying the CEO 321 the salary of a worker in stock options/grants is not not problematic to society to be completely unconvincing. Both illustrate to me the historic and increasing inequality in distribution of income and wealth. Asking me to ignore that divide and instead sympathize with someone like Carl Icahn is obscene in a humorous way.
    - missedthecue 6y ago
      Why is it a problem then? Your personal intuitions about how much any human should earn in a given year sounds less like a convincing argument to me and more like envy.
      - Florin_Andrei 6y ago
        > Why is it a problem then? I honestly think the Ayn Rand crowd are missing a few circuits. Well, that's a crude way of putting it, but let's just say it's like color blindness but for ethics. No amount of oratory will make a color-blind person see red. And that's just the way it is. Those "circuits" play an important role in regulating how groups behave. Lacking them, you open the door for extremely bad things to happen. This is why libertarianism and related ideologies should be treated with extreme caution at best.
greatgib 6y ago
First, when PG compare wealth of rich persons, he does not just compare salaries but the total wealth that come from the total of incomes. Second, there is something not to forget about the stocks: It is a "right" to the proportional part of all the future financial results of the company. . So, let's forget about inflation and consider equivalent dollars: Imagine you have a 30 employees company, that will generate 1000$ of income. Of these 1000$, there is a 50% margin, so it remains 500$ of benefit. . In 1965: - Boss will have a salary of 200$ - 30 employees total wages of 300$ (so 10$ per person) - Net result of 0$ (total of stocks, going to the boss anyway) . In 2017, same company and conditions: - Boss will have a salary of 50$ - 30 employees total wages of 19,23$ (so 0,64$ per person) - Net result of 430,77$ The net result belongs to Boss + other shareholders. -> boss get: 150$ -> other shareholders get: 280,77$ (So in result 200$ for the boss, 0,64$ per employee, 312-1 ratio) . Some people will say that the stocks value, based on valuation, does not correspond to 1 year of revenue. So, for example a 100$ stocks might correspond to an expectation of 10 years of 10$ benefit. But, on the previous article the 312-1 ratio corresponds to a year compensation, that is repeated every year. So it means that as a boss, you will also get new stocks or bigger capital for your stock every year to have this ratio maintained.
markvdb 6y ago
> If there is outrage over CEO pay, it doesn't make sense to come from the unions or left politicians, it should be coming from activist hedge fund billionaires, which it does. One doesn't have to be a shareholder or even a direct stakeholder in a specific company to claim the right to outrage over this growing inequality in pay.
- missedthecue 6y ago
  The question is whether anyone is worse off because of it, and my comment points out that contrary to popular rhetoric, if anyone is getting hurt by it, it's not the employees. If you think nobody is getting hurt by it, it's not a problem, it's just envy.
  - markvdb 6y ago
    It's certainly possible to view these things from other perspectives than a narrow transactional economic perspective. Can you imagine some of those?
    - missedthecue 6y ago
      Yes, jealousy and envy that other people do in fact make more money than I do. This is not a real societal problem, it's a personal and human nature problem.
jjav 6y ago
> CEO salaries today are still about 20-1 Base salaries are not significant to the discussion. Sometime high profile CEOs make $1 salary. What matters it the total comp, just as with any employee. Some FAANG engineers might make $175K in base salary but total comp is over 1M.
jjav 6y ago
> They come from diluting Wall Street. Knowing this, the whole thing is way less of an outrage. The outrage is why all that dilution goes to the CEO. Options can be granted to all employees more fairly than common these days.
heavyset_go 6y ago
This analysis is about as apt as saying, "Larry Ellison's salary was only $1, so what are you complaining about?"
- missedthecue 6y ago
  The guardian article and the commenter I replied to are pointing out the difference between 1965 and 2020 as if it's a problem. A problem is defined as something that has a negative impact on people. My analysis points out that the only people that modern CEO pay has a negative impact on is the shareholders. I illustrated that it makes literally no difference to your average floor worker whether the CEO gets $0 or $20 million in stock comp.
  - lanstin 6y ago
    If that worker has a pension or 401k, then it does matter. The fleecing isn't directly from him, but aggregate it by "managerial class" and "middle class" and you see the high $ managerial cash flows are directly at the expense of the middle class and retirement of the middle class. Thru in some tax policy, and you can see it is also taking money away from education of young middle class folks, and investment in communal things like roads and public health and so on.
    - missedthecue 6y ago
      Yes, it hurts shareholders. That's what I wrote in my first comment. You agree with me then?
      - lanstin 6y ago
        I agree it's a diversion of wealth from the workers to the management class.
  - CPLX 6y ago
    This argument is fucking ludicrous. Money is money. If the business used to have it and now the CEO has it then the business gave it to him. There's no class of equity that wasn't originally created and owned by the business so that's where the money comes from. And lest there be any confusion, all the companies we're talking about do massive stock buy backs so it's not even hypothetical, they spend billions of dollars to prop up the price of stocks and the executives get it.
fshbbdssbbgdd 6y ago
> But these don't come from the cashflow of the business like wages and salary. They come from diluting Wall Street. This distinction doesn’t make sense. Cash and stock are fungible for a public company.
- diogofranco 6y ago
  This, many companies even make this quite explicit by issuing stock to employees and buying back the same number of shares, in order to pay with cash flow rather than dilution.
bumby 6y ago
And in that context, the article does speak to this point. >the companies themselves are more valuable, because newly founded companies grow faster than they used to. The added reliance on stock-based compensation combined with higher valuations leads to higher CEO salaries. This isn't making a case one way or the other about whether this is a fair or sustainable model, just meant to bolster your point about why greater context is needed when discussing executive salaries as a multiple of the individual employee.
amalcon 6y ago
> But these don't come from the cashflow of the business like wages and salary. They come from diluting Wall Street. How are these different? If the business pays its employees $X more, that money doesn't just appear out of nowhere. It comes out of other areas of the business -- such as capex, M&A, or retained profits. All of these things contribute directly to the value of the shares held by Wall Street, whether directly (in the case of a dividend or share buyback) or indirectly by growing the business. Likewise, dilution means that an existing shareholder benefits less from $X worth of these things, and therefore should demand an increase in X (or a reduced stock price). It's all money either way, and money is fungible.
confidantlake 6y ago
This distinction seems meaningless. At the end of the day, the stockholders own the business. They are paying the salaries of both the CEO and the pallet worker, regardless if it comes in the form of cash or stock. Also wages don't always come from cashflow. Amazon lost money for its first X years. Salaries and everything else were covered by investor cash.
royaltjames 6y ago
Salary isn't How People Get Rich Now, seems like you missedthecue.
WalterBright 6y ago
> Stock based compensation didn't exist in 1965. In 1965 employees also typically got pensions, the value of which is not counted in those figures.
fredophile 6y ago
What does "diluting wall street" mean? How is it different from "taking money from the business owners"? If I'm CEO at a company what difference does it make to me if I'm compensated by salary or shares/bonuses? If I'm an employee at a company what difference does it make to me if the CEO is compensated by salary or shares/bonus3s? If I'm a shareholder in a company what difference does it make to me if the CEO is compensated by salary or shares/bonuses? The distinction between salary and bonus compensation is irrelevant outside of possibly some minor tax impacts.
CPLX 6y ago
This is nonsense. What you clearly have here is a principal/agent problem. The way it works is like this: 1) Money is invested in companies by a diffuse set of investors. That diffuse group is unified by people responsible for managing money. 2) They invest it with the intention of having it go into the productive activities of a business, such as staff and plant and equipment or technology or software or marketing. That money when received by the business is managed by the company management. 3) What is actually happening is that each of these gatekeepers is taking as much as they can get away with. It really isn't all that much more complicated than that. They'll concoct increasingly complex rationalizations and call it "performance" and launch decades of public relations (like the article we're all commenting on) but at the end of the day the people who should be tasked with fairly apportioning resources in a common enterprise are taking more and more of it for themselves. The solution is to stop letting them get away with it.
foobiekr 6y ago
I'm not going to name companies, but I think this is actually not quite right. While I agree with your broader point, in a lot of larger legacy companies the heavy use of buybacks to buoy the stock price, which in turn benefits executing compensation, directly plays into whether that cash is available to use for employee compensation.

gip 6y ago

Exactly. And I also think looking at money only may not go far enough. At the end of the day what matters is the amount of resources that the society allow a person to enjoy during her/his life, from food to home ownership to work opportunities, to access to vaccine. It's pretty clear that a new class of people (founders, VCs and people close to them) are capturing a larger part of the resources today while the majority gets a decreasing share of that. And we should all be working at finding way to reverse that trend.

WalterBright 6y ago
They're creating the value, not taking it from others.
- gip 6y ago
  What you are missing is that the resources in the world that matter are bounded. So if a minority is creating most of the value at scale, they will be able to redirect most of the resources to themselves. This drives the increase in inequality. That is why thinking purely in financial terms is misleading. It's not because everyone has more $$$ in the bank that everyone is better off.
  - shuckles 6y ago
    Is it really the case that Jeff Bezos is consuming a million times more finite resources than someone whose net worth is $100k? It seems to me like what you buy with virtually infinite money is status like hanging out or sleeping with celebrities, a seat in important rooms, and assets. There is only so much additional jet fuel and human labor a multi-billionaire can consume.
    - WalterBright 6y ago
      SpaceX, etc. That's what you do with billions to spend.
      - 6y ago

crazygringo 6y ago

> taken from the average employee cut of the profits There's never been any such thing. In the US, salaries have always been determined by the supply and demand of skills, they've never been linked to profitability or some share of it. And stock options and stock grants are relatively new (not really a thing in 1960), so if anything the actual employee share of profits -- since the value of stock is future profits discounted -- has gone up. The idea that CEO compensation is somehow "at the expense of" employee compensation is a pure myth. If CEO's were paid less, the extra money would flow to shareholders, not employees.

lanstin 6y ago
And the shareholders are often held by pension or 401k funds for the employee retirements. Certainly in aggregate, and all the companies have seemed to decide that this fleecing is a good thing all at once.

ikeboy 6y ago

The companies are much bigger today. If you run a company that's 10 times as big, why is it surprising that you're getting 10 times the compensation? You'd need to compare to similarly sized companies today. Instead, they look at the top 350 companies now and then.

extra88 6y ago
The workers that produce 10 times as much today (because of newer technologies, techniques, etc.) don't get paid 10 times as much. Worker productivity has continued to climb, decade after decade, but inflation-adjusted worker pay is basically flat over the same time period.
- ikeboy 6y ago
  This is a myth, and if you look into the statistics of the people pushing this Big Lie, you'll find that they cheat and use different inflation metrics for productivity and for compensation.
  - jason0597 6y ago
    Can you show us these Big Lie statistics? Can you post a link or two for further reading?
    - extra88 6y ago
      They probably won't deliver but I will. Here's a top hit "The Productivity–Pay Gap" [0], what I was talking about, from the Economic Policy Institute, a pro-worker, left-leaning think tank [1]. The top google hit for the "myth" is "Debunking a Myth in 1 Chart: Wage & Productivity Growth" [2] from the American Action Forum, a conservative think tank affiliated with a conservative, Republican advocacy group [3]. Basically it claims the original report compared data that aren't comparable. There's also "Why the gap between worker pay and productivity might be a myth" [4] from the American Enterprise Institute, a conservative think tank [5]. I didn't read them closely but part of the methodology in the AEI article used salary and benefits instead of just salary to draw a compensation line closer to productivity. Given that health care is such a huge part of the cost of those benefits, maybe the claim should be that company shareholders are sharing the wealth with workers but that health care costs are so out of control it's eating up all the workers' gains. EPI response to criticisms, "Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay" [6]. [0] https://www.epi.org/productivity-pay-gap/ https://www.epi.org/productivity-pay-gap/ [1] https://en.wikipedia.org/wiki/Economic_Policy_Institute https://en.wikipedia.org/wiki/Economic_Policy_Institute [2] https://www.americanactionforum.org/insight/debunking-a-myth-in-1-chart-wage-productivity-growth/ https://www.americanactionforum.org/insight/debunking-a-myth... [3] https://en.wikipedia.org/wiki/American_Action_Network https://en.wikipedia.org/wiki/American_Action_Network [4] https://www.aei.org/economics/political-economy/the-decline-of-unions-didnt-cause-the-growing-gap-between-pay-and-productivity-which-may-not-be-happening-either-study/ https://www.aei.org/economics/political-economy/the-decline-... [5] https://en.wikipedia.org/wiki/American_Enterprise_Institute https://en.wikipedia.org/wiki/American_Enterprise_Institute [6] https://www.epi.org/publication/understanding-the-historic-divergence-between-productivity-and-a-typical-workers-pay-why-it-matters-and-why-its-real/ https://www.epi.org/publication/understanding-the-historic-d...

fallingfrog 6y ago

Yeah much of the innovation has been in ways to elude labor laws (Uber) or ways to get rid of labor unions (moving production to China) or ways to hack tax laws (stock buybacks, shell companies, always showing zero profit on the balance sheet). That’s where the profit comes from.

Aerroon 6y ago

Imagine looking at the 5 deadliest plane crashes in 1970 and comparing them to the 5 deadliest plane crashes in 2010. You find that more people died in these crashes in 2010 than 1970. You wouldn't conclude that air travel is now less safe than in the 70s, would you? There was a lot more air travel in 2010 compared to 1970. The 5 deadliest flights makes up a much smaller portion of all flights in 2010 than it did in 1970. It's a misleading comparison. You should instead look at the number of deaths per passenger or per passenger mile. You have to think of the same point when looking at the "top 350 companies in the USA in 1965 vs 2017". Are the companies the same size in 2017? Do CEOs have the same amount of responsibility in 2017? Is the complexity of managing the company the same in 2017 as it was in 1965? What percentage of all companies do these top 350 make up? These are all factors you might want to take into account when looking at a specific number of top companies. I'd be curious to know what the numbers would look like if they looked at the top 1% or top 0.1% of companies in the US instead. Or perhaps even the average and median companies. My guess is that those stats wouldn't be politically as useful. I imagine that you'd still see a growing disparity, but a smaller one.

bumby 6y ago
Not entirely sure why you're being downvoted but I think these are at least relevant considerations. There seems to be a lot of contradictory academic claims about CEO compensation so I thought referencing a meta-analysis would be the most useful[1]. If company size is a proxy for your complexity claim, that seems to be much more informative regarding executive pay. Actual company performance was only about 5% predictive, compared to 40% for firm size. It seems like the heuristic I've heard about the "best way to get a raise is to grow your department not necessarily grow your profit" may have a seed of truth to it. [1]https://www.researchgate.net/profile/Steve-Werner-3/publication/247569983_How_Much_Does_Performance_Matter_A_Meta-analysis_of_CEO_Pay_Studies/links/56c4febd08ae736e70471099/How-Much-Does-Performance-Matter-A-Meta-analysis-of-CEO-Pay-Studies.pdf https://www.researchgate.net/profile/Steve-Werner-3/publicat...

bhl 6y ago

With respect to tech companies, the compensation ratio is a good starter to get people to think about wealth inequality but as tool or metric for public policy, it is useless. Here's my intuition on that: - it doesn't answer how much of the wealth was created (endogenous) or taken (zero sum): tech companies can simultaneously induce new demand and preferences while replacing older companies - it doesn't answer whether the average worker or society as a whole is better or worse with a lower or higher compensation ratio, because by averaging you lose nuance; for example, are more or less people employed by tech companies now then by the companies that were replaced? are the worker salaries themselves higher or lower compared previous worker salaries? For me, higher compensation ratios in _tech_ companies is good for people in tech: tech requires less labor for inch of market cap, while that labor is compensated higher. Whether or not that's an overall good for society though, idk.

imgabe 6y ago

That doesn't have a lot to do with tech companies. First, the ratio compares CEO compensation with stock options to worker wages (without stock options), whereas many of the workers at tech companies are also getting stock options. Second, pg is talking about the Forbes 100 where the founders of tech companies are represented. The founders didn't get their stock by being granted it as compensation in stock options, they got it by virtue of founding the company. Whatever they have left, they have because that's what they were able to keep and not sell or get diluted. For example, Bezos' wealth is mostly due to the fact that he owns ~13% of Amazon. He didn't get that as CEO compensation, he got it by founding the company.