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CEO pay is a red herring in respect to income inequality. Companies today are over 6x bigger today than they were in 1989. Even if they got paid 6x more, CEOs a

by Aunche 6y ago

CEO pay is a red herring in respect to income inequality. Companies today are over 6x bigger today than they were in 1989. Even if they got paid 6x more, CEOs as a whole aren't taking any more wealth from the company than they used to. Wealth inequality primarily comes from the concentration of equity. The richest CEOs all make negligible compensation. Bezo's salary is roughly $80k and Zuckerberg's is $1.

MuffinFlavored 6y ago
Isn't salary a "red herring" in CEO compensation? I know that you know this but I'll remind you. It's mainly stock options/shares, not the $1 or $80k salary lol
- Aunche 6y ago
  Zuckerberg and Bezos aren't receiving new equity grants either.
jandrese 6y ago
Looking only at the base pay completely misses the picture for CEO compensation as you have noted. Obviously Bezos didn't make $13B in a single day from his $80k/year salary. Imagine if he took that 13 Billion Dollar single day income and spread it across every employee at Amazon. That would be a life changing amount of money for almost every warehouse worker. Roughly $22,500 each. And that's just one day for Bezos. https://www.cnbc.com/2020/07/21/bezos-record-multibillion-dollar-net-worth-gain-bloomberg.html https://www.cnbc.com/2020/07/21/bezos-record-multibillion-do...
- valuearb 6y ago
  He never made $13B in a day. It's just a stock price fluctuation that can be given back tomorrow. He doesn't get to spend it. And even if you count stock fluctuations as income, he never earned it in one day, he earned it over 25 years of work.
- turbinerneiter 6y ago
  The value of Amazon is based on their labour force and their willingness to work under the conditions they do for the pay they get. If you give all of them 22k, a lot of them will use that money to jump ship. The value of Amazon will go down. The value of a corporation is the _willingness of their staff to cooperate_. For low skill workers, higher pay can enable them to work their way up to higher skill jobs, which reduces their willingness to cooperate at the low wage job, which reduces the value of the cooperation. I feel like I just earned a nobel price in economics, but I guess a real economist will quickly put holes in my epic bubble^^
  - jandrese 6y ago
    LOL at the "you gotta treat them like slaves for maximum productivity" argument.
    - turbinerneiter 6y ago
      I mean I'm not making the argument that this is a good idea, but if your company runs on low skill workers working very hard for very low pay, keeping them low skill is key to keep them willing to work that job. Maybe I'm being disrespectful to these job, assuming that skilling up won't make them more productive and valuable.
- sigstoat 6y ago
  this focus on the value of his stocks, and their fluctuations, is silly. not only could he not liquidate all of his holdings in under a few years without killing the stock price (and making the later sales worth less), but part of the value of amazon is bezos' oversight. if he dumps all his stock, the public elects a new board, which elects a new chairman, and they pick some new CEO, amazon wouldn't be worth as much as it is now. (also he'd bleed away a chunk of whatever he sold off in capital gains taxes. his cost basis is presumably somewhere near $0, since he founded the company and has held from the start.)
  - jandrese 6y ago
    $13B is not even close to "all of his holdings". It is about 6% of his total net worth. It would also be around $17.5% of what he earned in 2020 alone. The capital gains taxes would be offset by having a 13 billion dollar charity donation. Amazon Workers Fund.
Salgat 6y ago
The bigger myth is that CEOs need to be paid more to be more productive. There's this silly idea that if you pay the same CEO 10x more, they suddenly become 10x as valuable to the company. CEO skill isn't some magical thing that scales infinitely with compensation, and these hundred million dollar compensation packages are grossly inflated to what they should be.
- qwytw 6y ago
  No, but paying a CEO more might allow you to hire a better (more productive) one.
- sigstoat 6y ago
  you've got it backwards. probably because it sounds more dramatic. of course paying someone more doesn't make them more valuable, in the same way paying extra for lunch doesn't make it a better lunch. rather, they're valuable to you, so you pay them more. in the same way that lunch at the high end restaurant costs more. perhaps the best CEOs, with their wealth of connections, aren't worth the additional cost. (like an overpriced restaurant.) interestingly, that's an investable thesis! you could go invest in companies with the cheapest CEOs. i look forward to hearing about your returns!
  - hogFeast 6y ago
    If you short the most expensive CEOs, you will do very well. I have been doing this for a long time. Weak CEOs are a prime source of alpha because the irrational behaviour that leads to them becoming CEOs (like thinking you need to pay 2x to get 2x output) is structual. Also, your view is based on one of the great lies that CEOs tell shareholders. CEOs do better when they are fully invested, and (the argument goes) big pay aligns incentives. It doesn't. Most CEOs cash out their options, buy a McMansion, and waste all their money. If you want to do well: you buy businesses that don't rely on CEO skill (if you rely on a skilled CEO, you are done for...you aren't getting one), and you align incentives (i.e. no option cashing, the CEO has 99% of their wealth invested permanently).
    - 6y ago
didibus 6y ago
The article says "compensation", from my understanding that includes equity and bonuses and all that, so it does seem to be comparing the full package of CEOs against the full package of workers.
derriz 6y ago
Yes. I don't see that a person is being treated more fairly working in a 1,000 employee company where the CEO earns $1m than working in a 10,000 employee company where the CEO earns $10m. The arithmetic says there's no difference - the "CEO tax" is the same for workers in each. The average size of companies in the US has increased dramatically and there has always been a very strong correlation between CEO compensation and the size of the company they lead. By ignoring this obvious confounding variable, the article undermines - maybe deliberately - the reader's ability to interpret the data. But then I believe the author's purpose is to generate heat/outrage rather than light. I mean it seems to me that an obvious question raised by this trend is why are companies getting bigger on average? And why are companies bigger in developed economies than developing ones[1]? Is there a natural limit to this growth in average company size? Or are we heading towards the entire economy being dominated by a few super-massive corporations? [1] https://markus-poschke.research.mcgill.ca/papers/mposchke_skillbias.pdf https://markus-poschke.research.mcgill.ca/papers/mposchke_sk...

by Aunche 6y ago

MuffinFlavored 6y ago

Isn't salary a "red herring" in CEO compensation? I know that you know this but I'll remind you. It's mainly stock options/shares, not the $1 or $80k salary lol

Aunche 6y ago
Zuckerberg and Bezos aren't receiving new equity grants either.

jandrese 6y ago

Looking only at the base pay completely misses the picture for CEO compensation as you have noted. Obviously Bezos didn't make $13B in a single day from his $80k/year salary. Imagine if he took that 13 Billion Dollar single day income and spread it across every employee at Amazon. That would be a life changing amount of money for almost every warehouse worker. Roughly $22,500 each. And that's just one day for Bezos. https://www.cnbc.com/2020/07/21/bezos-record-multibillion-dollar-net-worth-gain-bloomberg.html https://www.cnbc.com/2020/07/21/bezos-record-multibillion-do...

valuearb 6y ago
He never made $13B in a day. It's just a stock price fluctuation that can be given back tomorrow. He doesn't get to spend it. And even if you count stock fluctuations as income, he never earned it in one day, he earned it over 25 years of work.
turbinerneiter 6y ago
The value of Amazon is based on their labour force and their willingness to work under the conditions they do for the pay they get. If you give all of them 22k, a lot of them will use that money to jump ship. The value of Amazon will go down. The value of a corporation is the _willingness of their staff to cooperate_. For low skill workers, higher pay can enable them to work their way up to higher skill jobs, which reduces their willingness to cooperate at the low wage job, which reduces the value of the cooperation. I feel like I just earned a nobel price in economics, but I guess a real economist will quickly put holes in my epic bubble^^
- jandrese 6y ago
  LOL at the "you gotta treat them like slaves for maximum productivity" argument.
  - turbinerneiter 6y ago
    I mean I'm not making the argument that this is a good idea, but if your company runs on low skill workers working very hard for very low pay, keeping them low skill is key to keep them willing to work that job. Maybe I'm being disrespectful to these job, assuming that skilling up won't make them more productive and valuable.
sigstoat 6y ago
this focus on the value of his stocks, and their fluctuations, is silly. not only could he not liquidate all of his holdings in under a few years without killing the stock price (and making the later sales worth less), but part of the value of amazon is bezos' oversight. if he dumps all his stock, the public elects a new board, which elects a new chairman, and they pick some new CEO, amazon wouldn't be worth as much as it is now. (also he'd bleed away a chunk of whatever he sold off in capital gains taxes. his cost basis is presumably somewhere near $0, since he founded the company and has held from the start.)
- jandrese 6y ago
  $13B is not even close to "all of his holdings". It is about 6% of his total net worth. It would also be around $17.5% of what he earned in 2020 alone. The capital gains taxes would be offset by having a 13 billion dollar charity donation. Amazon Workers Fund.

Salgat 6y ago

The bigger myth is that CEOs need to be paid more to be more productive. There's this silly idea that if you pay the same CEO 10x more, they suddenly become 10x as valuable to the company. CEO skill isn't some magical thing that scales infinitely with compensation, and these hundred million dollar compensation packages are grossly inflated to what they should be.

qwytw 6y ago
No, but paying a CEO more might allow you to hire a better (more productive) one.
sigstoat 6y ago
you've got it backwards. probably because it sounds more dramatic. of course paying someone more doesn't make them more valuable, in the same way paying extra for lunch doesn't make it a better lunch. rather, they're valuable to you, so you pay them more. in the same way that lunch at the high end restaurant costs more. perhaps the best CEOs, with their wealth of connections, aren't worth the additional cost. (like an overpriced restaurant.) interestingly, that's an investable thesis! you could go invest in companies with the cheapest CEOs. i look forward to hearing about your returns!
- hogFeast 6y ago
  If you short the most expensive CEOs, you will do very well. I have been doing this for a long time. Weak CEOs are a prime source of alpha because the irrational behaviour that leads to them becoming CEOs (like thinking you need to pay 2x to get 2x output) is structual. Also, your view is based on one of the great lies that CEOs tell shareholders. CEOs do better when they are fully invested, and (the argument goes) big pay aligns incentives. It doesn't. Most CEOs cash out their options, buy a McMansion, and waste all their money. If you want to do well: you buy businesses that don't rely on CEO skill (if you rely on a skilled CEO, you are done for...you aren't getting one), and you align incentives (i.e. no option cashing, the CEO has 99% of their wealth invested permanently).
  - 6y ago

didibus 6y ago

The article says "compensation", from my understanding that includes equity and bonuses and all that, so it does seem to be comparing the full package of CEOs against the full package of workers.

derriz 6y ago

Yes. I don't see that a person is being treated more fairly working in a 1,000 employee company where the CEO earns $1m than working in a 10,000 employee company where the CEO earns $10m. The arithmetic says there's no difference - the "CEO tax" is the same for workers in each. The average size of companies in the US has increased dramatically and there has always been a very strong correlation between CEO compensation and the size of the company they lead. By ignoring this obvious confounding variable, the article undermines - maybe deliberately - the reader's ability to interpret the data. But then I believe the author's purpose is to generate heat/outrage rather than light. I mean it seems to me that an obvious question raised by this trend is why are companies getting bigger on average? And why are companies bigger in developed economies than developing ones[1]? Is there a natural limit to this growth in average company size? Or are we heading towards the entire economy being dominated by a few super-massive corporations? [1] https://markus-poschke.research.mcgill.ca/papers/mposchke_skillbias.pdf https://markus-poschke.research.mcgill.ca/papers/mposchke_sk...