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I would love it if someone could explain to me like I'm 5, why it is exactly, that CEOs are so highly paid. I get that it's hard. I get that there are long ho

I would love it if someone could explain to me like I'm 5, why it is exactly, that CEOs are so highly paid. I get that it's hard. I get that there are long hours. I get that it requires long-term strategic thinking. None of that helps me understand O(100M) "compensation." I'm pretty sure that executives get paid so much because of (a) their rolodex (ie. their ability to get certain people on the phone) and (b) because the world has -- not accidentally -- become convinced that it must be so and now it is that way. And everyone believes that were it not for O(100M) CEOs companies would fail. Lots of jobs are hard and require extremely smart, gifted people. And yet somehow only executives get huge "compensation." Someone please break it down for me Barney-style because it seems like bullshit to me.

jl2718 5y ago
Most responses are trying to tell you why they ‘deserve’ their pay. True or not, this is irrelevant. CEO pay is set by the board in the same vote that sets their own compensation. ‘The company’ is not a sentient being. Nobody is looking out for its best interests. 5-year-olds from most cultures would have a hard time understanding this because it breaks their understanding from adult-child stewardship.
- jordanpg 5y ago
  It reminds me of the immortal line from The Usual Suspects: "The greatest trick the devil ever pulled was convincing the world he didn't exist."
  - jl2718 5y ago
    We shouldn’t moralize this. The point is that CEOs and board members are going to act exactly like anybody else in their position. Find a different structure if you want a different behavior.
slantaclaus 5y ago
I’m not sure I could adequately explain this to a 5 year old, but it really just comes down to the perception of supply and actual demand. I say perception because even though a “random person off the street” might be able to successfully run a Fortune 500 company, most of them wouldn’t and the boards/shareholders won’t tolerate the risk of allowing untested leaders to run massive companies. On the flip side, just because someone has experience and a good track record of results doesn’t mean they will succeed in future endeavors—a good example of this is that Pepsi guy (John Sculley) who took the helm at Apple and drove its business to the brink of death, this despite being paid in 1987 the highest salary of any company in the valley.
villasv 5y ago
> Lots of jobs are hard and require extremely smart, gifted people. And yet somehow only executives get huge "compensation." Someone please break it down for me Barney-style because it seems like bullshit to me. The higher your position in leadership, the higher responsibility of your decisions. Higher responsibilities are associated with higher financial risk. Higher financial risk yields higher financial returns. It's the same reason consultants get paid so much for delivering mediocre projects. They are paid well not because they're great, but because they de-risk whoever is above. A board of directors want a CEO that de-risk their fiduciary obligations and they will pay for it in excess. I know a few companies that are not paying CEOs that much, because they're stable businesses. Little risk, less need for top-notch smooth-talking and cold blooded decisions. Most big companies are facing more risk than you imagine, though, because those risks are measured possibly in decades of strategic decisions and impact in future shareholder value.
- jordanpg 5y ago
  Thank you for positing something other than the brilliance and talent of executives! :) However, while I understand the idea of de-risking to minimize financial and legal risk by hiring certain executives and consultants, it still doesn't help me understand why that translates to paying certain individuals so much money. No matter how this is presented, it seems to always boil down to 2 possibilities. One, these people are really so talented (in the sense of rare athletes) that they are worth O(100M). I think this theory is patent nonsense, because I simply don't agree that what they do is difficult in the same way that, say, theoretical particle physics is hard. Or two, various synthetic legal and historical forces have gradually driven the compensations of these people astronomically high in such a way that the economy depends on it, and people believe that it makes sense, like some kind of religion. This is hand-waving and conspiracy-sounding, I know. But it is the only way I can make sense of it.
  - villasv 5y ago
    Well, to us, it obviously looks like too much money. But do you agree that CEO's decision making could take a company stock to anywhere between -5% and +5% its current value in the next year? That's a lot of value at risk. It's orders of magnitude higher compared to the risk related to decision making of regular top management (who already earns in excess of millions).
anigbrowl 5y ago
Read this book (or its more academic cousin if you want a quantitative treatment): https://en.wikipedia.org/wiki/The_Dictator%27s_Handbook https://en.wikipedia.org/wiki/The_Dictator%27s_Handbook CEOs are basically dictators with mercenary/conscript armies (depending on market and market conditions) which engage in economic rather than military competition. There are two parts to the job: expanding the size of the profit pie, and slicing it up in such a way as to keep stakeholders happy. founder-CEOs are in a special position, eg Mark Zuckerberg structured FB so that a large chunk of the stock has no voting rights; if shareholders want to remove him they have to resort to the courts (obviously, the reality is more complex than this thumbnail sketch).
koonsolo 5y ago
That is simple: because CEO's need to be the best of the best. Most professions require an average performer. Building my house didn't require the best of the best. Programming software doesn't require the best of the best. But there are other professions where you need (to be) the best of the best: athletes, musicians, authors, ... . Coincidentally also the professions where the top performers make a crazy amount of money, and the average ones starve. If you invest your money into a company, and hire an average CEO, you company will be crushed by a competitor that hired the top of the top CEO. That is why shareholders are willing to pay so much money, because they are fishing in the same pond as their competitors, and will be crushed when picking the average performer.
- robertlagrant 5y ago
  > That is simple: because CEO's need to be the best of the best. I don't think this is the case at all. The prime criteria are: 1) Have you been a CEO before of at least a medium sized-company? If so you'll probably be able to handle lots of CEO-type situations. 2) (Not crucial.) Have you done it in this sector already? If so we can talk to others in the sector and figure out a bit about you and your relationships.
- jordanpg 5y ago
  I don't agree that they are the "best of the best." Or at least it's not obvious to me that they are, in the same way a talented musician or athlete is. The supply/demand theory only explains the high cost of CEOs if there is an extremely limited pool of them. Because I reject the premise that they are just so incredibly talented, there shouldn't be a limited pool of them. I suspect the pool is limited, but not because CEOs are just so incredibly talented. I don't know exactly why, but I doubt it's raw talent. I suspect it has more to do with access, background, friends, networks, gumption, dedication, and luck. Anyway, my objection is to the grotesque size of their compensation. Since I don't believe the "talent pool" theory, no matter how talented they may be, it cannot possibly be worth that much. Thus, the numbers are so high for some other reason, and now everyone is post-hoc convincing themselves that it makes sense. It does not. It makes no sense at all. The emperor has no clothes on. It is self-evidently absurd to imagine that this limited pool of executives has so much talent and is so small that they deserve to be paid 1000s of times more than the best physicists, physicians, artists, etc. the world has. It's bullshit. /rant
impulser_ 5y ago
Supply and Demand. The supply of great CEOs is very limited, but the demand is very high. Therefore the price of CEOs are very high.
thehappypm 5y ago
Kyle's dad is the coach of your soccer team, right? Kyle's dad gets really really excited when you do well. He makes it fun, and you love going to practice! And you guys seem to win a lot! Do you remember last year, when Mike's dad was the coach? He yelled a lot, you hated going to practice, he made you cry? And you never seemed to win? Because Kyle's dad is a better coach, you win more. He's worth more to the team. Even though Kyle's dad isn't actually playing on the field, he makes you guys win. That's what a CEO does -- he makes a team win.
- jordanpg 5y ago
  Right, lots of wins are good, but why does the coach need to get paid $100M? Why is $1M not good enough? Let me guess: because being a coach is so hard, and requires so incredibly much smarts and talent that only a precious few people have?
  - JohnPrine 5y ago
    If this is true, why don't companies just higher people who are willing to be CEO for less money?
    - thehappypm 5y ago
      Why don’t companies hire software engineers who are willing to write code for less money? People tend to want to be paid market value
  - _dps 5y ago
    Many people with the skills to be CEOs of important companies would consider $1M a rounding error. It makes no difference to their economic outlook. Also, there are many ways to make $1M without the risk and responsibility of being a CEO (among other things, just making low-risk investments with a $20M portfolio). So between the comparative ease of making $1M elsewhere, and the low impact of $1M (to someone with tens of millions in the bank), it's not surprising why such people cannot be had for that price.

jl2718 5y ago

Most responses are trying to tell you why they ‘deserve’ their pay. True or not, this is irrelevant. CEO pay is set by the board in the same vote that sets their own compensation. ‘The company’ is not a sentient being. Nobody is looking out for its best interests. 5-year-olds from most cultures would have a hard time understanding this because it breaks their understanding from adult-child stewardship.

jordanpg 5y ago
It reminds me of the immortal line from The Usual Suspects: "The greatest trick the devil ever pulled was convincing the world he didn't exist."
- jl2718 5y ago
  We shouldn’t moralize this. The point is that CEOs and board members are going to act exactly like anybody else in their position. Find a different structure if you want a different behavior.

slantaclaus 5y ago

I’m not sure I could adequately explain this to a 5 year old, but it really just comes down to the perception of supply and actual demand. I say perception because even though a “random person off the street” might be able to successfully run a Fortune 500 company, most of them wouldn’t and the boards/shareholders won’t tolerate the risk of allowing untested leaders to run massive companies. On the flip side, just because someone has experience and a good track record of results doesn’t mean they will succeed in future endeavors—a good example of this is that Pepsi guy (John Sculley) who took the helm at Apple and drove its business to the brink of death, this despite being paid in 1987 the highest salary of any company in the valley.

villasv 5y ago

> Lots of jobs are hard and require extremely smart, gifted people. And yet somehow only executives get huge "compensation." Someone please break it down for me Barney-style because it seems like bullshit to me. The higher your position in leadership, the higher responsibility of your decisions. Higher responsibilities are associated with higher financial risk. Higher financial risk yields higher financial returns. It's the same reason consultants get paid so much for delivering mediocre projects. They are paid well not because they're great, but because they de-risk whoever is above. A board of directors want a CEO that de-risk their fiduciary obligations and they will pay for it in excess. I know a few companies that are not paying CEOs that much, because they're stable businesses. Little risk, less need for top-notch smooth-talking and cold blooded decisions. Most big companies are facing more risk than you imagine, though, because those risks are measured possibly in decades of strategic decisions and impact in future shareholder value.

jordanpg 5y ago
Thank you for positing something other than the brilliance and talent of executives! :) However, while I understand the idea of de-risking to minimize financial and legal risk by hiring certain executives and consultants, it still doesn't help me understand why that translates to paying certain individuals so much money. No matter how this is presented, it seems to always boil down to 2 possibilities. One, these people are really so talented (in the sense of rare athletes) that they are worth O(100M). I think this theory is patent nonsense, because I simply don't agree that what they do is difficult in the same way that, say, theoretical particle physics is hard. Or two, various synthetic legal and historical forces have gradually driven the compensations of these people astronomically high in such a way that the economy depends on it, and people believe that it makes sense, like some kind of religion. This is hand-waving and conspiracy-sounding, I know. But it is the only way I can make sense of it.
- villasv 5y ago
  Well, to us, it obviously looks like too much money. But do you agree that CEO's decision making could take a company stock to anywhere between -5% and +5% its current value in the next year? That's a lot of value at risk. It's orders of magnitude higher compared to the risk related to decision making of regular top management (who already earns in excess of millions).

anigbrowl 5y ago

Read this book (or its more academic cousin if you want a quantitative treatment): https://en.wikipedia.org/wiki/The_Dictator%27s_Handbook https://en.wikipedia.org/wiki/The_Dictator%27s_Handbook CEOs are basically dictators with mercenary/conscript armies (depending on market and market conditions) which engage in economic rather than military competition. There are two parts to the job: expanding the size of the profit pie, and slicing it up in such a way as to keep stakeholders happy. founder-CEOs are in a special position, eg Mark Zuckerberg structured FB so that a large chunk of the stock has no voting rights; if shareholders want to remove him they have to resort to the courts (obviously, the reality is more complex than this thumbnail sketch).

koonsolo 5y ago

That is simple: because CEO's need to be the best of the best. Most professions require an average performer. Building my house didn't require the best of the best. Programming software doesn't require the best of the best. But there are other professions where you need (to be) the best of the best: athletes, musicians, authors, ... . Coincidentally also the professions where the top performers make a crazy amount of money, and the average ones starve. If you invest your money into a company, and hire an average CEO, you company will be crushed by a competitor that hired the top of the top CEO. That is why shareholders are willing to pay so much money, because they are fishing in the same pond as their competitors, and will be crushed when picking the average performer.

robertlagrant 5y ago
> That is simple: because CEO's need to be the best of the best. I don't think this is the case at all. The prime criteria are: 1) Have you been a CEO before of at least a medium sized-company? If so you'll probably be able to handle lots of CEO-type situations. 2) (Not crucial.) Have you done it in this sector already? If so we can talk to others in the sector and figure out a bit about you and your relationships.
jordanpg 5y ago
I don't agree that they are the "best of the best." Or at least it's not obvious to me that they are, in the same way a talented musician or athlete is. The supply/demand theory only explains the high cost of CEOs if there is an extremely limited pool of them. Because I reject the premise that they are just so incredibly talented, there shouldn't be a limited pool of them. I suspect the pool is limited, but not because CEOs are just so incredibly talented. I don't know exactly why, but I doubt it's raw talent. I suspect it has more to do with access, background, friends, networks, gumption, dedication, and luck. Anyway, my objection is to the grotesque size of their compensation. Since I don't believe the "talent pool" theory, no matter how talented they may be, it cannot possibly be worth that much. Thus, the numbers are so high for some other reason, and now everyone is post-hoc convincing themselves that it makes sense. It does not. It makes no sense at all. The emperor has no clothes on. It is self-evidently absurd to imagine that this limited pool of executives has so much talent and is so small that they deserve to be paid 1000s of times more than the best physicists, physicians, artists, etc. the world has. It's bullshit. /rant

impulser_ 5y ago

Supply and Demand. The supply of great CEOs is very limited, but the demand is very high. Therefore the price of CEOs are very high.

thehappypm 5y ago

Kyle's dad is the coach of your soccer team, right? Kyle's dad gets really really excited when you do well. He makes it fun, and you love going to practice! And you guys seem to win a lot! Do you remember last year, when Mike's dad was the coach? He yelled a lot, you hated going to practice, he made you cry? And you never seemed to win? Because Kyle's dad is a better coach, you win more. He's worth more to the team. Even though Kyle's dad isn't actually playing on the field, he makes you guys win. That's what a CEO does -- he makes a team win.

jordanpg 5y ago
Right, lots of wins are good, but why does the coach need to get paid $100M? Why is $1M not good enough? Let me guess: because being a coach is so hard, and requires so incredibly much smarts and talent that only a precious few people have?
- JohnPrine 5y ago
  If this is true, why don't companies just higher people who are willing to be CEO for less money?
  - thehappypm 5y ago
    Why don’t companies hire software engineers who are willing to write code for less money? People tend to want to be paid market value
- _dps 5y ago
  Many people with the skills to be CEOs of important companies would consider $1M a rounding error. It makes no difference to their economic outlook. Also, there are many ways to make $1M without the risk and responsibility of being a CEO (among other things, just making low-risk investments with a $20M portfolio). So between the comparative ease of making $1M elsewhere, and the low impact of $1M (to someone with tens of millions in the bank), it's not surprising why such people cannot be had for that price.