3 ms·

> 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

> 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).
  - jordanpg 5y ago
    I agree about the magnitude of the risk, but it is not obvious to me that risk magnitude is proportional to compensation. Clearly there is some relationship between the two, but I don't see why it would be directly proportional. If we think of executives as machines or devices, then it makes some kind of sense, from the standpoint of a balance sheet. If there's a $5M risk, you might buy a $3M device to mitigate it and still clear $2M. To this I would observe that executives are unlike machines in several important ways. There is no guarantee that they will perform the way they are advertised, or as well. They are generally guaranteed to be lavishly paid, whether they succeed or not. Most importantly, if, as I believe, the compensations are synthetically high and there is no genuine supply and demand basis for these compensations, then there is no economic need to pay them so much. Those same jobs could be done by those same people for less. There is nothing particularly special about these people other than their ability to be identified as a magic, oh-so-wise business executive. My central premise (that I assert without evidence) is that the astronomically high compensations of these people is a social construct. It is shored up by years of legal and corporate machinations that have worked a bit too well. Not any sort of basic economic force. And now it is fait accompli.

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).
- jordanpg 5y ago
  I agree about the magnitude of the risk, but it is not obvious to me that risk magnitude is proportional to compensation. Clearly there is some relationship between the two, but I don't see why it would be directly proportional. If we think of executives as machines or devices, then it makes some kind of sense, from the standpoint of a balance sheet. If there's a $5M risk, you might buy a $3M device to mitigate it and still clear $2M. To this I would observe that executives are unlike machines in several important ways. There is no guarantee that they will perform the way they are advertised, or as well. They are generally guaranteed to be lavishly paid, whether they succeed or not. Most importantly, if, as I believe, the compensations are synthetically high and there is no genuine supply and demand basis for these compensations, then there is no economic need to pay them so much. Those same jobs could be done by those same people for less. There is nothing particularly special about these people other than their ability to be identified as a magic, oh-so-wise business executive. My central premise (that I assert without evidence) is that the astronomically high compensations of these people is a social construct. It is shored up by years of legal and corporate machinations that have worked a bit too well. Not any sort of basic economic force. And now it is fait accompli.