4 ms·

How is it hard to understand that if a person was in charge of deciding how much HE made, at the expense of others, he would favor himself?

adam_arthur 5y ago
There's a market rate dictated by supply and demand for labor. In some lines of business you can overpay and do ok. But imagine a restaurant paying double the wage of one next door. Likely this reflects through into pricing and makes them non-competitive/prone to failure, as restaurants are low margin businesses. The US has had a large surplus of low skilled labor for the past few decades, thus low bargaining power. There's a pretty obvious reason why, but I'll leave it for you to guess.
mjburgess 5y ago
Yes, but CEOs arent in charge of how much they make. Labour is priced by the market. Prices aren't "decided" by anyone -- this is just something newspapers rant about to create outrage.
- dragonwriter 5y ago
  > Labour is priced by the market. The market is an idealized abstraction, not a real thing that exists. CEO pay is decided by Boards of Directors, which CEOs tend to be on, and which are part of a narrow, highly connected class that CEOs are also members of. > Prices aren't "decided" by anyone Yes, the prices that a firm will offer for particular work are decided by particular decision-makers at the firm, not abstract outside forces. The market is a model of the the aggregate of factors influencing the decisions those people make, and the decisions employees make about accepting work.
  - mjburgess 5y ago
    The firm decides whether to hire at a price the CEO asks; not what to pay. There is maybe a percentage of leeway, but not a lot. A salary is just what it costs to retain your employment -- that's it. When you can find higher pay elsewhere, eventually you will take the offer. Companies arent donating money. CEO pay has only become significant in recent years because of equity, ie., CEOs since the 80s have increasingly been paid in shares. That is where the disparaity comes from. Since the CEOs job is largely to focus on the share price -- do you see why giving them lots of equity is exactly the sensible thing to do?
    - rswail 5y ago
      The CEOs job is not to focus on the share price. It's to focus on the business being profitable and successful. The resulting share price is a side effect, not a goal. Having a high share price is a secondary indicator of expected revenue, growth, and profit. Giving CEOs equity is exactly the wrong sort of incentive, because it provides opportunities of massaging the expected long term results to achieve short term price variations in the favor of the CEO.
      - mjburgess 5y ago
        The company is owned by its shareholders who vote on issues such as CEO pay and the board compensation. The business being "profitable and successful" is the objective of its owners because they want a return on their investment. It is the objective of the CEO only insofar as that is what they are hired to do. CEOs are given equity to align their incentives with the company owners. Im not sure who you think is hiring CEOs or why, but it isn't someone with an idealistic sense of "success". The CEO is given their mandate by the company investors.
- oceanghost 5y ago
  absolute nonsense. Most boards are cohorts with CEOs.
- bildung 5y ago
  CEO compensation and company performance are not correlated, there's an abundance of studies about that available. If we accept the axiom that their compensation is based on rational decisions of market participatents, what do they decide CEO compensation on, if not company performance? Can't we describe the reality better if we accept that the "labor market" as an analogy to e.g. a potato market or washing machine market is a faulty model?
  - mjburgess 5y ago
    Are any salaries correlated with company performance? Salaries are determined by the market price for that labour; meaning if you want to hire Alice to be your CEO you are bidding against others who also want Alice. The price is what Alice will take to work for you, and not another company. That is essentially how all salaries are set. There is no mystery. The public steadfastly refuse to believe in anything other than a mythological-moral meaning to prices. It is absolutely bizarre. Prices arent set by anyone and have no moral significance. (All this stuff about tech "scalping" given shortages is likewise the same fallacy. )
  - refurb 5y ago
    Since CEO compensation tends to have a very large component of equity, saying "CEO compensation and company performance are not correlated" is clearly not true.
- Marazan 5y ago
  The market is made up of people. Including people who look at the pay rise the CEO is getting and are willi g to strike until they get piece of the pie. The market isn't a seamless black box that spits out price signals. It is people.
- cycomanic 5y ago
  That might be true if we had a perfect market, but that does not exist. In particular the board who decides the CEO salary is disproportionately made up from other CEOs and upper management. They have a self interest in keeping CEO salaries high. Moreover many also like to inflate the importance of upper management on company performance (which we see at every management level), which again leads to higher salaries. Finally, often CEO pay is regarded as a status symbol, which essentially completely disconnects it from market considerations

adam_arthur 5y ago

There's a market rate dictated by supply and demand for labor. In some lines of business you can overpay and do ok. But imagine a restaurant paying double the wage of one next door. Likely this reflects through into pricing and makes them non-competitive/prone to failure, as restaurants are low margin businesses. The US has had a large surplus of low skilled labor for the past few decades, thus low bargaining power. There's a pretty obvious reason why, but I'll leave it for you to guess.

mjburgess 5y ago

Yes, but CEOs arent in charge of how much they make. Labour is priced by the market. Prices aren't "decided" by anyone -- this is just something newspapers rant about to create outrage.

dragonwriter 5y ago
> Labour is priced by the market. The market is an idealized abstraction, not a real thing that exists. CEO pay is decided by Boards of Directors, which CEOs tend to be on, and which are part of a narrow, highly connected class that CEOs are also members of. > Prices aren't "decided" by anyone Yes, the prices that a firm will offer for particular work are decided by particular decision-makers at the firm, not abstract outside forces. The market is a model of the the aggregate of factors influencing the decisions those people make, and the decisions employees make about accepting work.
- mjburgess 5y ago
  The firm decides whether to hire at a price the CEO asks; not what to pay. There is maybe a percentage of leeway, but not a lot. A salary is just what it costs to retain your employment -- that's it. When you can find higher pay elsewhere, eventually you will take the offer. Companies arent donating money. CEO pay has only become significant in recent years because of equity, ie., CEOs since the 80s have increasingly been paid in shares. That is where the disparaity comes from. Since the CEOs job is largely to focus on the share price -- do you see why giving them lots of equity is exactly the sensible thing to do?
  - rswail 5y ago
    The CEOs job is not to focus on the share price. It's to focus on the business being profitable and successful. The resulting share price is a side effect, not a goal. Having a high share price is a secondary indicator of expected revenue, growth, and profit. Giving CEOs equity is exactly the wrong sort of incentive, because it provides opportunities of massaging the expected long term results to achieve short term price variations in the favor of the CEO.
    - mjburgess 5y ago
      The company is owned by its shareholders who vote on issues such as CEO pay and the board compensation. The business being "profitable and successful" is the objective of its owners because they want a return on their investment. It is the objective of the CEO only insofar as that is what they are hired to do. CEOs are given equity to align their incentives with the company owners. Im not sure who you think is hiring CEOs or why, but it isn't someone with an idealistic sense of "success". The CEO is given their mandate by the company investors.
oceanghost 5y ago
absolute nonsense. Most boards are cohorts with CEOs.
bildung 5y ago
CEO compensation and company performance are not correlated, there's an abundance of studies about that available. If we accept the axiom that their compensation is based on rational decisions of market participatents, what do they decide CEO compensation on, if not company performance? Can't we describe the reality better if we accept that the "labor market" as an analogy to e.g. a potato market or washing machine market is a faulty model?
- mjburgess 5y ago
  Are any salaries correlated with company performance? Salaries are determined by the market price for that labour; meaning if you want to hire Alice to be your CEO you are bidding against others who also want Alice. The price is what Alice will take to work for you, and not another company. That is essentially how all salaries are set. There is no mystery. The public steadfastly refuse to believe in anything other than a mythological-moral meaning to prices. It is absolutely bizarre. Prices arent set by anyone and have no moral significance. (All this stuff about tech "scalping" given shortages is likewise the same fallacy. )
- refurb 5y ago
  Since CEO compensation tends to have a very large component of equity, saying "CEO compensation and company performance are not correlated" is clearly not true.
Marazan 5y ago
The market is made up of people. Including people who look at the pay rise the CEO is getting and are willi g to strike until they get piece of the pie. The market isn't a seamless black box that spits out price signals. It is people.
cycomanic 5y ago
That might be true if we had a perfect market, but that does not exist. In particular the board who decides the CEO salary is disproportionately made up from other CEOs and upper management. They have a self interest in keeping CEO salaries high. Moreover many also like to inflate the importance of upper management on company performance (which we see at every management level), which again leads to higher salaries. Finally, often CEO pay is regarded as a status symbol, which essentially completely disconnects it from market considerations