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>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

>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
  >The comparison is ludicrous because most CEOs are paid like Lebron but have the skill of his teammates. I agree with you on this. However, do you expect the CEOs who are willing to take a comp that is x10 less to be just as good? Something tells me they won't be. Like, sure, an average software dev even at a highly paid place like Google is "decent", not "great" (like LeBron would be in this analogy). However, do you think that Google would be willing to just switch to hiring all those other "mediocre" devs from Infosys or Tata for $40-50k/yr? After all, Google's own engineers are just "good enough" on average, and that would be a massive money saver. And yet they don't do it, and neither do their competitors.
  - hogFeast 6y ago
    Last I checked Tata had quite a few engineers working for them...is that accurate?
    - filoleg 6y ago
      Yeah, Tata and Infosys both have tons of people employed as software devs for pennies. They both make money by letting their clients outsource their workforce with Tata providing that workforce and billing at much higher rates than what those people earn, thus getting a really really nice profit margin. Nothing wrong with that in concept, but the way they went about it was terrible, especially considering that they were paying those devs like $40k/yr in Bay Area (which is an insanity). That was the whole premise of the big H1B visa controversy, with most applicants from more "legitimate" tech companies and outside of that being pissed off that they have to participate in the visa lottery due to most of the visa cap each year taken by Tata and Infosys employees who each get paid much less (which, in turn, makes the justification for H1B visa for them much shakier).
Salgat 6y ago
That's part of the myth though, and your example is a great point supporting that. Sports franchises don't invest in top names because of performance, they invest in top names because it's marketing gold. These athletes of course have to perform well, but their value in performance becomes detached from their pay as they become more and more valuable for their marketing to the franchise. It's the same thing with CEOs and shareholders. When you pay outrageous compensations for CEOs, shareholders look in awe as that CEO must be amazing if they are receiving such high compensation, and as long as they do a decent job, they feel justified; it's one big positive feedback loop. It's how mediocre CEOs like Marissa Mayer was able to get over $200 million in compensation, even though her background, while impressive, didn't warrant it. Yahoo shareholders ate that up. Take a look at someone like Shaquille O'Neal, who was able to command a 20 million dollar contract in 2009 even when he was at the end of his career and past his prime. He was marketing gold for his team.

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
>The comparison is ludicrous because most CEOs are paid like Lebron but have the skill of his teammates. I agree with you on this. However, do you expect the CEOs who are willing to take a comp that is x10 less to be just as good? Something tells me they won't be. Like, sure, an average software dev even at a highly paid place like Google is "decent", not "great" (like LeBron would be in this analogy). However, do you think that Google would be willing to just switch to hiring all those other "mediocre" devs from Infosys or Tata for $40-50k/yr? After all, Google's own engineers are just "good enough" on average, and that would be a massive money saver. And yet they don't do it, and neither do their competitors.
- hogFeast 6y ago
  Last I checked Tata had quite a few engineers working for them...is that accurate?
  - filoleg 6y ago
    Yeah, Tata and Infosys both have tons of people employed as software devs for pennies. They both make money by letting their clients outsource their workforce with Tata providing that workforce and billing at much higher rates than what those people earn, thus getting a really really nice profit margin. Nothing wrong with that in concept, but the way they went about it was terrible, especially considering that they were paying those devs like $40k/yr in Bay Area (which is an insanity). That was the whole premise of the big H1B visa controversy, with most applicants from more "legitimate" tech companies and outside of that being pissed off that they have to participate in the visa lottery due to most of the visa cap each year taken by Tata and Infosys employees who each get paid much less (which, in turn, makes the justification for H1B visa for them much shakier).

Salgat 6y ago

That's part of the myth though, and your example is a great point supporting that. Sports franchises don't invest in top names because of performance, they invest in top names because it's marketing gold. These athletes of course have to perform well, but their value in performance becomes detached from their pay as they become more and more valuable for their marketing to the franchise. It's the same thing with CEOs and shareholders. When you pay outrageous compensations for CEOs, shareholders look in awe as that CEO must be amazing if they are receiving such high compensation, and as long as they do a decent job, they feel justified; it's one big positive feedback loop. It's how mediocre CEOs like Marissa Mayer was able to get over $200 million in compensation, even though her background, while impressive, didn't warrant it. Yahoo shareholders ate that up. Take a look at someone like Shaquille O'Neal, who was able to command a 20 million dollar contract in 2009 even when he was at the end of his career and past his prime. He was marketing gold for his team.