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They should then be compensated with a leveraged long-term derivative product that pays based on the stock difference between their company and the industry, 5

They should then be compensated with a leveraged long-term derivative product that pays based on the stock difference between their company and the industry, 5 to 10 years apart. "You want to be insanely rich? Here's a huge company that's not yours as a resource, now make it so it is the best one in 10 years!"

andi999 5y ago
All incentive models for ceos miss the point, that incentives do not work. People will just fulfill the metric, without incentive most people will do what is best for the company.
Taek 5y ago
The problem is that the best CEOs might not go for that. There are a lot of long term things that can impact a company for the negative, and you don't want your CEO bailing to a different company the moment that some macro event (semiconductor shortage, new competitor, global pandemic, etc) comes along and alters the long term upside of your company. You want a CEO who is going to stick around and make the best possible decisions to improve the company's trajectory, even if that mostly means keeping the company flat as opposed to faceplanting.
- whimsicalism 5y ago
  > the best CEOs might not go for that. There are a lot of long term things that can impact a company for the negative You could develop a financial services company selling hedges for that risk to CEOs/executives? > alters the long term upside of your company I don't see how this is worse than short-term stock compensation
  - MattGaiser 5y ago
    > I don't see how this is worse than short-term stock compensation The CEO has an incentive not to destroy the existing value in pursuit of large gains. With compensation based on the industry spread, they may as well risk any existing value as it is worthless to them. Currently: A CEO who does nothing but keep the stock price where it is would get 2 million. If he performs as well as average, he might get 4 million. If he beats the industry, he gets 6 million. With leveraged spread system: A CEO who does nothing but keeps the stock price stable gets 0. A CEO who performs as well as industry gets 0. If he beats industry, he gets 6.
- SavantIdiot 5y ago
  > The problem is that the best CEOs might not go for that. We created that system, we can change it. CEO entitlement is part of the problem because it has become burned into our culture that they are demigods. They are not.
  - hluska 5y ago
    Ever worked for a company with a truly garbage CEO?? Good heavens, when you’ve got a moron there, you might as well be an air traffic controller at asshole airport.
cma 5y ago
Wouldn't it only make sense to gamble away the company in that scenario? Heads you win and the options pays out big, tails bankruptcy, but the option is worth the same as if you just did mediocre (worth nothing).
hervature 5y ago
I find it funny that people throw out decades of history. Options contracts, as you propose, introduce the incentive for extreme risk taking because doing "normal boring" things literally doesn't pay. It's one of the main arguments for stock compensation because if the company does poorly, the CEO directly feels it where it hurts (the wallet).
- sn41 5y ago
  And so they go for stock buyback strategies. Reduce the supply, the stock skyrockets, cash in, leave.
  - MattGaiser 5y ago
    You need profits for stock buybacks. Buybacks are just superior to dividends as a way to return capital.
    - andromeduck 5y ago
      Dividends ought to not be at a tax disadvantage over capital gains for this reason.
      - MattGaiser 5y ago
        The problem is also unrealised gains vs realised ones. I don't pay any tax on the stock price increasing. I have to pay tax on dividends. If I don't need the money, I can just let it continue to grow tax free.
      - wrigby 5y ago
        Are they not? I thought qualified dividends (that is, dividends on stocks that have been held long enough to qualify for long-term capital gains) are taxed at the long-term capital gains rate.
        freeone3000 5y ago
mellavora 5y ago
what makes you think this isn't already the case? CEO comps often include stock options.
- nathanappere 5y ago
  If you prevent CEOs from selling their stock for the next X years, sure.
  - setr 5y ago
    Isn't that also usually the case? There's generally a vesting period.
MattGaiser 5y ago
So what incentive does that CEO have to be cautious with my capital? That just encourages extreme risk.
lbriner 5y ago
Isn't part of the problem the overlap between action and effect? I might join a business as CEO and it does really well for 5 years because of the previous CEO, I could claim that it is my leadership and ask for my bonus. On the other hand, maybe I do well but my successor is an idiot and makes the company tank so now I won't get my 10 year bonus because they screwed it all up. Unless your idea only works for CEOs who are prepared to stay for 10 years? That then brings in the complication of when you need them to leave quietly because they are rubbish but you don't want your shareholders to know!
- aapppwe 5y ago
  this is the problem with any leadership position in general, congress, president.... etc I think the best way to address this is to provide standardize kpi monitoring.
  - mason55 5y ago
    When a measure becomes a target, it ceases to be a good measure Especially for a CEO, who has quite a bit of power to optimize for any measure, it's going to be very hard to craft a measure that gives the results you want and can't be gamed. The most likely outcome is something that's just a worse version of the stock price, because the stock price is just a forward-looking approximation of net income, which is what you'd mostly want to optimize for anyway (ignoring things like B corps).
DaniloDias 5y ago
I find this statement strange. Curious if others experience aligns with mine: Being a CEO is all consuming. You don’t want to be a parent and a CEO, cause the company comes first. You don’t want to be married and a CEO, because the company comes first. If you could “automate” this job, the developers behind the scripts become de facto CEO. Their scripts cannot fail. They will have to make the same sacrifices as the meatspace CEO. I dunno if it’s an Icarus thing or what, but the closer I am in interactions with ceos, the more I pity them. Asking these people to trade their lives for the possibility of no payout seems doomed to fail. The only reason people trade their lives for this role is because it is worth the personal damage and risk.
- munk-a 5y ago
  When I worked in the game industry QA folks were regularly asked to put in twelve to sixteen hours a day - they're sacrificing their health and lives for their jobs but without any promise of payout. Ditto for pretty much anyone else working on the bottom 3/4ths of the economy.
  - DaniloDias 5y ago
    My immediate reaction is the diff between CEO and QA is that QA doesn’t negotiate well. They’re willing to endure bad work for limited pay. You don’t want this type of person leading a company. I’ve also worked (and left) the field of gaming QA. FWIW, I’m not trying to being controversial- this is my sincerely held belief. I think gaming QA is a good foot in the door to a career in tech, but something that should be abandoned as soon as you get a feel for what it takes to work in an agile environment and make your deliverables. The gaming industry seems like the place where you go to kill your health and happiness to me. As long as people keep signing up for the work, conditions will be awful.
    - munk-a 5y ago
      I would suggest a different take-away, it takes power and stability to negotiate power. Basically, you need to have a powerful position to gamble on securing better compensation. If minimum wage were a problem unique to QA[1] then that explanation might ring true but I think the fact that you see the same pattern of exploitation in fast-food and the service sector at large paints a clearer picture that our educational system is just failing to teach people they have personal value. I do agree that the difference between a good CEO and a terrible CEO can be pretty stark - but I also think that the best CEO can't turn around a company rife with nepotism and other organizational diseases - the plebs contribute a lot more to company health than they're given credit for... That's my primary source of disagreement on CEO compensation - everyone else is being undervalued and so the creation of value is being misattributed to a CEO. The CEO should probably be the highest earner at nearly every company - but only rarely should the CEO earn five or six times that of someone in the mail room and we shouldn't see the 200:1 ratios that are relative common today[2]. 1. It does have a unique exacerbating factor, every year a bunch of new grads think "Oh man, video games - I want to work on those" and thus there's a large pool of people willing to be paid peanuts to work in the field. This causes the experienced QA folks to have their labour devalued to compete with the large pool of free labour. I very much agree with your last few sentences - that's what seems to be the take-away for the gaming industry for me as well. 2. A random study - I know the numbers are in this ballpark but I'm not familiar with the specifics https://www.epi.org/publication/ceo-compensation-2018/ https://www.epi.org/publication/ceo-compensation-2018/
lolthishuman 5y ago
Then try that and see if it’s better. There shouldn’t be a one way forced option.
DeonPenny 5y ago
The issue is what if the CEO refuses. If he's good at his job or the business is in need he could always go to a different company and get paid what he can negotiate for.
anm89 5y ago
They should be compensated however their board says they should be compensated. You don't get a say in that. I could say that all German people should wear purple shirts. It doesn't much matter unless I have a proposed method to enforce it.

andi999 5y ago

All incentive models for ceos miss the point, that incentives do not work. People will just fulfill the metric, without incentive most people will do what is best for the company.

Taek 5y ago

The problem is that the best CEOs might not go for that. There are a lot of long term things that can impact a company for the negative, and you don't want your CEO bailing to a different company the moment that some macro event (semiconductor shortage, new competitor, global pandemic, etc) comes along and alters the long term upside of your company. You want a CEO who is going to stick around and make the best possible decisions to improve the company's trajectory, even if that mostly means keeping the company flat as opposed to faceplanting.

whimsicalism 5y ago
> the best CEOs might not go for that. There are a lot of long term things that can impact a company for the negative You could develop a financial services company selling hedges for that risk to CEOs/executives? > alters the long term upside of your company I don't see how this is worse than short-term stock compensation
- MattGaiser 5y ago
  > I don't see how this is worse than short-term stock compensation The CEO has an incentive not to destroy the existing value in pursuit of large gains. With compensation based on the industry spread, they may as well risk any existing value as it is worthless to them. Currently: A CEO who does nothing but keep the stock price where it is would get 2 million. If he performs as well as average, he might get 4 million. If he beats the industry, he gets 6 million. With leveraged spread system: A CEO who does nothing but keeps the stock price stable gets 0. A CEO who performs as well as industry gets 0. If he beats industry, he gets 6.
SavantIdiot 5y ago
> The problem is that the best CEOs might not go for that. We created that system, we can change it. CEO entitlement is part of the problem because it has become burned into our culture that they are demigods. They are not.
- hluska 5y ago
  Ever worked for a company with a truly garbage CEO?? Good heavens, when you’ve got a moron there, you might as well be an air traffic controller at asshole airport.

cma 5y ago

Wouldn't it only make sense to gamble away the company in that scenario? Heads you win and the options pays out big, tails bankruptcy, but the option is worth the same as if you just did mediocre (worth nothing).

hervature 5y ago

I find it funny that people throw out decades of history. Options contracts, as you propose, introduce the incentive for extreme risk taking because doing "normal boring" things literally doesn't pay. It's one of the main arguments for stock compensation because if the company does poorly, the CEO directly feels it where it hurts (the wallet).

sn41 5y ago
And so they go for stock buyback strategies. Reduce the supply, the stock skyrockets, cash in, leave.
- MattGaiser 5y ago
  You need profits for stock buybacks. Buybacks are just superior to dividends as a way to return capital.
  - andromeduck 5y ago
    Dividends ought to not be at a tax disadvantage over capital gains for this reason.
    - MattGaiser 5y ago
      The problem is also unrealised gains vs realised ones. I don't pay any tax on the stock price increasing. I have to pay tax on dividends. If I don't need the money, I can just let it continue to grow tax free.
    - wrigby 5y ago
      Are they not? I thought qualified dividends (that is, dividends on stocks that have been held long enough to qualify for long-term capital gains) are taxed at the long-term capital gains rate.
      - freeone3000 5y ago

mellavora 5y ago

what makes you think this isn't already the case? CEO comps often include stock options.

nathanappere 5y ago
If you prevent CEOs from selling their stock for the next X years, sure.
- setr 5y ago
  Isn't that also usually the case? There's generally a vesting period.

MattGaiser 5y ago

So what incentive does that CEO have to be cautious with my capital? That just encourages extreme risk.

lbriner 5y ago

Isn't part of the problem the overlap between action and effect? I might join a business as CEO and it does really well for 5 years because of the previous CEO, I could claim that it is my leadership and ask for my bonus. On the other hand, maybe I do well but my successor is an idiot and makes the company tank so now I won't get my 10 year bonus because they screwed it all up. Unless your idea only works for CEOs who are prepared to stay for 10 years? That then brings in the complication of when you need them to leave quietly because they are rubbish but you don't want your shareholders to know!

aapppwe 5y ago
this is the problem with any leadership position in general, congress, president.... etc I think the best way to address this is to provide standardize kpi monitoring.
- mason55 5y ago
  When a measure becomes a target, it ceases to be a good measure Especially for a CEO, who has quite a bit of power to optimize for any measure, it's going to be very hard to craft a measure that gives the results you want and can't be gamed. The most likely outcome is something that's just a worse version of the stock price, because the stock price is just a forward-looking approximation of net income, which is what you'd mostly want to optimize for anyway (ignoring things like B corps).

DaniloDias 5y ago

I find this statement strange. Curious if others experience aligns with mine: Being a CEO is all consuming. You don’t want to be a parent and a CEO, cause the company comes first. You don’t want to be married and a CEO, because the company comes first. If you could “automate” this job, the developers behind the scripts become de facto CEO. Their scripts cannot fail. They will have to make the same sacrifices as the meatspace CEO. I dunno if it’s an Icarus thing or what, but the closer I am in interactions with ceos, the more I pity them. Asking these people to trade their lives for the possibility of no payout seems doomed to fail. The only reason people trade their lives for this role is because it is worth the personal damage and risk.

munk-a 5y ago
When I worked in the game industry QA folks were regularly asked to put in twelve to sixteen hours a day - they're sacrificing their health and lives for their jobs but without any promise of payout. Ditto for pretty much anyone else working on the bottom 3/4ths of the economy.
- DaniloDias 5y ago
  My immediate reaction is the diff between CEO and QA is that QA doesn’t negotiate well. They’re willing to endure bad work for limited pay. You don’t want this type of person leading a company. I’ve also worked (and left) the field of gaming QA. FWIW, I’m not trying to being controversial- this is my sincerely held belief. I think gaming QA is a good foot in the door to a career in tech, but something that should be abandoned as soon as you get a feel for what it takes to work in an agile environment and make your deliverables. The gaming industry seems like the place where you go to kill your health and happiness to me. As long as people keep signing up for the work, conditions will be awful.
  - munk-a 5y ago
    I would suggest a different take-away, it takes power and stability to negotiate power. Basically, you need to have a powerful position to gamble on securing better compensation. If minimum wage were a problem unique to QA[1] then that explanation might ring true but I think the fact that you see the same pattern of exploitation in fast-food and the service sector at large paints a clearer picture that our educational system is just failing to teach people they have personal value. I do agree that the difference between a good CEO and a terrible CEO can be pretty stark - but I also think that the best CEO can't turn around a company rife with nepotism and other organizational diseases - the plebs contribute a lot more to company health than they're given credit for... That's my primary source of disagreement on CEO compensation - everyone else is being undervalued and so the creation of value is being misattributed to a CEO. The CEO should probably be the highest earner at nearly every company - but only rarely should the CEO earn five or six times that of someone in the mail room and we shouldn't see the 200:1 ratios that are relative common today[2]. 1. It does have a unique exacerbating factor, every year a bunch of new grads think "Oh man, video games - I want to work on those" and thus there's a large pool of people willing to be paid peanuts to work in the field. This causes the experienced QA folks to have their labour devalued to compete with the large pool of free labour. I very much agree with your last few sentences - that's what seems to be the take-away for the gaming industry for me as well. 2. A random study - I know the numbers are in this ballpark but I'm not familiar with the specifics https://www.epi.org/publication/ceo-compensation-2018/ https://www.epi.org/publication/ceo-compensation-2018/

lolthishuman 5y ago

Then try that and see if it’s better. There shouldn’t be a one way forced option.

DeonPenny 5y ago

The issue is what if the CEO refuses. If he's good at his job or the business is in need he could always go to a different company and get paid what he can negotiate for.

anm89 5y ago

They should be compensated however their board says they should be compensated. You don't get a say in that. I could say that all German people should wear purple shirts. It doesn't much matter unless I have a proposed method to enforce it.