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I couldn't quickly find data back to 1965, but I did find that the S&P500 market cap as a percentage of GDP has grown by 2.75x since the late 80s, whereas CEOs

by whakim 5y ago

I couldn't quickly find data back to 1965, but I did find that the S&P500 market cap as a percentage of GDP has grown by 2.75x since the late 80s, whereas CEOs are paid ~5x more relative to the average worker in that time. Additionally, the trends don't really change if you take the S&P500 out of it - economy-wide CEOs are paid much more relative to ordinary workers than they used to be. Even if the biggest companies are bigger and more complicated than they used to be (I find this hard to believe - is Facebook really bigger and more complicated than Standard Oil, AT&T, IBM, or GE?), the typical company probably isn't. Most economists would also point out the tight correlation between CEO pay and stock market caps, which means that CEOs aren't being paid more because they're doing a particularly good job. > I think the framing of justifiable or not is the wrong framing. If these CEOs are adding value above and beyond their huge pay packet, then their existence is making your and my lives better off, so their incredible wealth should not concern anyone. Everyone wins. If there are losers due to externalities, that's where the government needs to step in. Everyone else who takes home less money as a result, loses. But if you don't believe me, consider a scenario in which CEOs earn thousands or tens of thousands of times the wage of the average worker - does that seem justifiable? What about a scenario in which the CEO earns everything?

fighterpilot 5y ago
> S&P500 market cap as a percentage of GDP has grown by 2.75x since the late 80s, whereas CEOs are paid ~5x more relative to the average worker in that time. Yeah. That's only part of the explanation for the observation. However, looking at it as a percentage of GDP is flawed and leads to an understatement of the effect. We need to look at it after adjusting for inflation only, since all that matters is how big these companies are in the absolute after applying the fixed threshold cutoff of 500. If you're normalizing by GDP, you're not comparing apples with apples when doing a temporal comparison. > economy-wide CEOs are paid much more relative to ordinary workers than they used to be. That's right, and I outlined some of the reasons for that, such as commodification of domestic lower skilled labor due to globalization and technology. > tight correlation between CEO pay and stock market caps, which means that CEOs aren't being paid more because they're doing a particularly good job. This hinges on how we define a "good job". If I'm the CEO of a small accounting firm, at best my decision making can improve profits by $1 million. If I'm the CEO of Apple, my decision making can improve profits by billions. That extreme leverage afforded by large companies is why one person can be paid so much money. The other aspect is supply and demand. Running Apple is not as easy as running a small accounting firm. The supply of people capable of doing that is much less. Hence the higher compensation. There's also selection effects we need to consider. Tim Cook is significantly more skilled than a randomly chosen CEO amongst small companies. Just like Michael Jordan is more skilled than a randomly chosen team captain from high school teams. It would be inaccurate to say that Michael Jordan isn't better than some randomly chosen team captain, just as it's inaccurate to say that Tim Cook isn't making superior decisions to some randomly chosen CEO from a small company. > Everyone else who takes home less money as a result, loses. This zero-sum mindset is just not accurate. If Tim Cook gets paid $500 million and his decision making leads to $50 billion in extra benefit for the org compared to what a second-best CEO could have brought in, then the org has gained $49.5 billion in excess value. Your mindset is that the org (and the people inside it) have lost ~$500 million without considering the unique value add that makes it worthwhile and win-win for everyone. If the board didn't think that Tim Cook was adding unique value above his compensation, then they would give him a pay cut or hired someone cheaper.
- whakim 5y ago
  > However, looking at it as a percentage of GDP is flawed and leads to an understatement of the effect. We need to look at it after adjusting for inflation only, since all that matters is how big these companies are in the absolute after applying the fixed threshold cutoff of 500. If you're normalizing by GDP, you're not comparing apples with apples when doing a temporal comparison. There are plenty of historical companies with higher market caps than today's companies in 2021 dollars. And again, if you compare the largest companies in 2021 with the largest companies in 1965 (using 2021 dollars), you'd find that their market caps are only ~2.5-3x the size (but yet their CEOs are paid 15x more relative to the average employee). But I think this misses the mark because a bigger company isn't necessarily harder to run. Nor is it clear that the CEO is making dramatically harder decisions. In fact, it seems equally plausible that the larger the company, the less of an effect the CEO has. > That's right, and I outlined some of the reasons for that, such as commodification of domestic lower skilled labor due to globalization and technology. This argument doesn't hold water, because the average employee salary (the one we're comparing the average CEO salary to) hasn't dramatically dropped in terms of purchasing power. In other words, your argument is that the average salary has gotten lower and therefore CEO pay appears higher - this isn't the case. > This hinges on how we define a "good job". If CEO pay was correlated to performance, we'd find that CEOs whose companies did better were better compensated. But we don't find this - we find that CEO pay is most correlated to the stock market. > This zero-sum mindset is just not accurate. If Tim Cook gets paid $500 million and his decision making leads to $50 billion in extra benefit for the org compared to what a second-best CEO could have brought in, then the org has gained $49.5 billion in excess value. Your mindset is that the org (and the people inside it) have lost ~$500 million without considering the unique value add that makes it worthwhile and win-win for everyone. If the board didn't think that Tim Cook was adding unique value above his compensation, then they would give him a pay cut or hired someone cheaper. This isn't true, because as noted above there isn't evidence that better-performing CEOs are paid better. Tim Cook isn't being paid his salary because the board believes he's adding such-and-such amount in value, but instead because CEO compensation is not related to the value added. However, you didn't answer my final question: is there a level of inequality that you would consider unjustifiable?
  - 5y ago

by whakim 5y ago

fighterpilot 5y ago

> S&P500 market cap as a percentage of GDP has grown by 2.75x since the late 80s, whereas CEOs are paid ~5x more relative to the average worker in that time. Yeah. That's only part of the explanation for the observation. However, looking at it as a percentage of GDP is flawed and leads to an understatement of the effect. We need to look at it after adjusting for inflation only, since all that matters is how big these companies are in the absolute after applying the fixed threshold cutoff of 500. If you're normalizing by GDP, you're not comparing apples with apples when doing a temporal comparison. > economy-wide CEOs are paid much more relative to ordinary workers than they used to be. That's right, and I outlined some of the reasons for that, such as commodification of domestic lower skilled labor due to globalization and technology. > tight correlation between CEO pay and stock market caps, which means that CEOs aren't being paid more because they're doing a particularly good job. This hinges on how we define a "good job". If I'm the CEO of a small accounting firm, at best my decision making can improve profits by $1 million. If I'm the CEO of Apple, my decision making can improve profits by billions. That extreme leverage afforded by large companies is why one person can be paid so much money. The other aspect is supply and demand. Running Apple is not as easy as running a small accounting firm. The supply of people capable of doing that is much less. Hence the higher compensation. There's also selection effects we need to consider. Tim Cook is significantly more skilled than a randomly chosen CEO amongst small companies. Just like Michael Jordan is more skilled than a randomly chosen team captain from high school teams. It would be inaccurate to say that Michael Jordan isn't better than some randomly chosen team captain, just as it's inaccurate to say that Tim Cook isn't making superior decisions to some randomly chosen CEO from a small company. > Everyone else who takes home less money as a result, loses. This zero-sum mindset is just not accurate. If Tim Cook gets paid $500 million and his decision making leads to $50 billion in extra benefit for the org compared to what a second-best CEO could have brought in, then the org has gained $49.5 billion in excess value. Your mindset is that the org (and the people inside it) have lost ~$500 million without considering the unique value add that makes it worthwhile and win-win for everyone. If the board didn't think that Tim Cook was adding unique value above his compensation, then they would give him a pay cut or hired someone cheaper.

whakim 5y ago
> However, looking at it as a percentage of GDP is flawed and leads to an understatement of the effect. We need to look at it after adjusting for inflation only, since all that matters is how big these companies are in the absolute after applying the fixed threshold cutoff of 500. If you're normalizing by GDP, you're not comparing apples with apples when doing a temporal comparison. There are plenty of historical companies with higher market caps than today's companies in 2021 dollars. And again, if you compare the largest companies in 2021 with the largest companies in 1965 (using 2021 dollars), you'd find that their market caps are only ~2.5-3x the size (but yet their CEOs are paid 15x more relative to the average employee). But I think this misses the mark because a bigger company isn't necessarily harder to run. Nor is it clear that the CEO is making dramatically harder decisions. In fact, it seems equally plausible that the larger the company, the less of an effect the CEO has. > That's right, and I outlined some of the reasons for that, such as commodification of domestic lower skilled labor due to globalization and technology. This argument doesn't hold water, because the average employee salary (the one we're comparing the average CEO salary to) hasn't dramatically dropped in terms of purchasing power. In other words, your argument is that the average salary has gotten lower and therefore CEO pay appears higher - this isn't the case. > This hinges on how we define a "good job". If CEO pay was correlated to performance, we'd find that CEOs whose companies did better were better compensated. But we don't find this - we find that CEO pay is most correlated to the stock market. > This zero-sum mindset is just not accurate. If Tim Cook gets paid $500 million and his decision making leads to $50 billion in extra benefit for the org compared to what a second-best CEO could have brought in, then the org has gained $49.5 billion in excess value. Your mindset is that the org (and the people inside it) have lost ~$500 million without considering the unique value add that makes it worthwhile and win-win for everyone. If the board didn't think that Tim Cook was adding unique value above his compensation, then they would give him a pay cut or hired someone cheaper. This isn't true, because as noted above there isn't evidence that better-performing CEOs are paid better. Tim Cook isn't being paid his salary because the board believes he's adding such-and-such amount in value, but instead because CEO compensation is not related to the value added. However, you didn't answer my final question: is there a level of inequality that you would consider unjustifiable?
- 5y ago