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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

by 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).
  - derriz 6y ago
    How do you short companies for a long time? To exploit a correlation between CEO compensation and stock-market returns, you surely need to hold a short position for years? I just can't see how to do that profitably given the high costs of shorting individual companies.
filoleg 6y ago
>There's this silly idea that if you pay the same CEO 10x more, they suddenly become 10x as valuable to the company. No one actually believes that. The problem is that if you don't pay a capable CEO 10x more, they are gonna leave elsewhere where they can get paid 10x more. And the only people to replace them who wouldn't be asking for the same amount of compensation are not the kind of people you would want to be your CEO. As others have said, CEOs aren't a commodity, just like top tier athletes and actors aren't. LeBron gets paid multiples of what his teammates make [0]. Most of his teammates on LA Lakers earn single digit low millions (with the average being even lower), while he made $39mil from his contract last year. Is he providing 10 times the value to the game that his teammates making under $3mil/yr do? I doubt it. But if you want LeBron, you gotta pay it up, because there isn't a lack of other teams out there who would be more than happy to pay him as much. 0. https://www.basketball-reference.com/contracts/LAL.html https://www.basketball-reference.com/contracts/LAL.html
- hogFeast 6y ago
  They aren't. In almost every case I have seen, the big CEO job will be the peak of that person's career. And CEOs are not like top tier athletes. The comparison is ludicrous because most CEOs are paid like Lebron but have the skill of his teammates. The number of actually good CEOs is far smaller than the number of CEOs...as in, there is usually one proven value creator per 10,000 CEOs. Btw, my sample isn't small. I worked in equity research, I can only think of one CEO I have personally come across who was actually good. One out of thousands (I say personally, there are probably ~5 that I have come across outside of my circle). Your average CEO is not just bad, they are usually actively harmful (because they tend to view becoming CEO as an achievement, they tend to apply few standards of common sense to their decision-making, the way Boards incentivize behaviour also makes no sense). The reason why this happens is two-fold: there is a culture of "the CEO", and most Boards are full of people who were also CEOs and believe they were very special. It is possible to prove this behaviour is irrational quite easily: how many CEOs have done nothing but fail, and still get hired? Lots. It is out of this world, irrational behaviour.
  - filoleg 6y ago

by Salgat 6y ago

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).
- derriz 6y ago
  How do you short companies for a long time? To exploit a correlation between CEO compensation and stock-market returns, you surely need to hold a short position for years? I just can't see how to do that profitably given the high costs of shorting individual companies.

filoleg 6y ago

>There's this silly idea that if you pay the same CEO 10x more, they suddenly become 10x as valuable to the company. No one actually believes that. The problem is that if you don't pay a capable CEO 10x more, they are gonna leave elsewhere where they can get paid 10x more. And the only people to replace them who wouldn't be asking for the same amount of compensation are not the kind of people you would want to be your CEO. As others have said, CEOs aren't a commodity, just like top tier athletes and actors aren't. LeBron gets paid multiples of what his teammates make [0]. Most of his teammates on LA Lakers earn single digit low millions (with the average being even lower), while he made $39mil from his contract last year. Is he providing 10 times the value to the game that his teammates making under $3mil/yr do? I doubt it. But if you want LeBron, you gotta pay it up, because there isn't a lack of other teams out there who would be more than happy to pay him as much. 0. https://www.basketball-reference.com/contracts/LAL.html https://www.basketball-reference.com/contracts/LAL.html

hogFeast 6y ago
They aren't. In almost every case I have seen, the big CEO job will be the peak of that person's career. And CEOs are not like top tier athletes. The comparison is ludicrous because most CEOs are paid like Lebron but have the skill of his teammates. The number of actually good CEOs is far smaller than the number of CEOs...as in, there is usually one proven value creator per 10,000 CEOs. Btw, my sample isn't small. I worked in equity research, I can only think of one CEO I have personally come across who was actually good. One out of thousands (I say personally, there are probably ~5 that I have come across outside of my circle). Your average CEO is not just bad, they are usually actively harmful (because they tend to view becoming CEO as an achievement, they tend to apply few standards of common sense to their decision-making, the way Boards incentivize behaviour also makes no sense). The reason why this happens is two-fold: there is a culture of "the CEO", and most Boards are full of people who were also CEOs and believe they were very special. It is possible to prove this behaviour is irrational quite easily: how many CEOs have done nothing but fail, and still get hired? Lots. It is out of this world, irrational behaviour.
- filoleg 6y ago