10 ms·

Focus: Executive pay and performance

76 points by stfu 15y ago

tocomment 15y ago
I wonder if they would find a correlation between board members not getting voted out and CEO pay. Maybe shareholders tend to be pleased if boards hire big name CEO's?
- wisty 15y ago
  Or CEOs who wow the shareholders get rewarded by board members?
- jtbigwoo 15y ago
  Many companies have what basically amounts to a board exchange where a high-ranking official from company A serves on the board of company B which has an official on company C's board and company C has an official on company A's board. In the end, it has the potential to be an "I'll scratch your back, you scratch mine" arrangement.
talmand 15y ago
And this is a surprise? I didn't need research to determine this, I just kept up with the news.
- scott_s 15y ago
  http://lesswrong.com/lw/im/hindsight_devalues_science/ http://lesswrong.com/lw/im/hindsight_devalues_science/
  - talmand 15y ago
    It's not hindsight as I'm reading the news article that day.
    - scott_s 15y ago
      Yes, it's hindsight because you're reading the conclusions of a study and saying "I could have guessed that." But you didn't know that, you suspected it. The point of doing such studies is to know. I also suspect, but obviously can't demonstrate, that someone would have said the same thing ("I could have told you that") were the conclusion the opposite.
      - deleted 15y ago
        [deleted]
vsl2 15y ago
Conflict of interest where the CEO (or his friends on the board) decide how much to pay him? Say it isn't so.
jbooth 15y ago
I really don't understand why people think any amount of pay over, say, a few million, for any position, makes any difference to anyone. Think about the people you know who are good at their job. Do they give a fuck about money if you give them enough that they're taken care of? No, they probably care a lot more about prestige, interesting problems, other ego-feeders besides a silly 8-digit number. Of course, CEOs are bound to be good negotiators and will negotiate themselves a higher number because why not. But is anyone going to argue that there's a serious quality of life difference between 20 and 100 million?
- cynicalkane 15y ago
  Like almost every software engineer, I get paid far less than a few million dollars. And like almost every software engineer (the bachelors, anyway) I get paid far more than I "need". But according to many HN articles, if I were to accept a job without negotiating my pay upward as much as is reasonable, I would be a sucker. TBH, if I heard a CEO of a for-profit didn't try to get a higher pay package, I'd be wondering about this CEO's business skill.
  - starwed 15y ago
    >TBH, if I heard a CEO of a for-profit didn't try to get a higher pay package, I'd be wondering about this CEO's business skill. That's because you, like all people, suck at thinking rationally. :D
  - jbooth 15y ago
    Of course he's gonna negotiate upwards. Someone good at the job of CEO would do so instinctively, because negotiating is a big part of their job and they like to do it well. But it's not what his performance or his quality of life is based on.
  - lambersley 15y ago
    The fault isn't being placed on the CEO. He is an individual who seeks personal gain primarily, places family interest and other similar motivators ahead of the needs of the organization he leads. Rather, fingers should be pointed at Boards who agree to ridiculous compensation packages.
cynicalkane 15y ago
The headline is probably true in the statistical sense. The sample size is undoubtedly small and economic data are often tainted by the efficiency effect--the 'experiment' is uncontrolled and actors might already be choosing the results that are best for them, dramatically reducing the apparent statistical effects of their decisions. Finally, CEO pay is often negotiated before performance becomes apparent, and for something like CEO I'd imagine it's really hard to tell how well they'll do in advance, even if you're trying to pick the best people for the job. It's not like there's a CEO aptitude test, it's not like the skills picked up being CEO of Pepsi are necessarily transferable to being CEO of Apple Computer (for example). The headline might also be true in the economic sense. I'm not especially qualified to judge this. The article, however, is quoting the apparently private data of one obscure financial research firm. So I'm filing it under Not News. (I also just noticed that they call Warren Buffet 'underpaid'. The guy earned fifty billion dollars being CEO of Berkshire Hathaway. Calling him 'underpaid' seems like a bit of a technicality.)
- JumpCrisscross 15y ago
  I think the point is the board should structure pay so that when the company does well the CEO automatically earns more and when it doesn't he doesn't.
  - cynicalkane 15y ago
    CEO pay is frequently structured like this already. CEOs will often get half or more of their pay in restricted stock and options, and it's not unheard of for their salary to be a token value like $100 or $1. They also have the incentive of not being fired, and being re-signed if they're on contract. The alleged problem is that the vesting/restriction periods for these stock and options is too short, like a few years. I have a pet idea that CEO pay should be mostly in stock that vests quickly but is restricted for a very long mean time, like 20 years. But that's just a pet idea and I bet it would be a very hard sell to potential CEOs. I also think pay for performance is overrated. It won't help if you have the wrong guy in the first place.
    - 15y ago
brianlouisw 15y ago
Paying CEOs for 'performance' may not be a significant improvement unfortunately. Daniel Kahneman, and Nassim Taleb have spoken about this - essentially that there's no good reason to think CEOs of large companys have any significant control over their company's outcomes. Our judgement is clouded by a combination of hindsight and narrative biases along with a significant underestimation of 'luck'. Kahneman quotes something like a .6 correlation IIRC. So, it CEO performance exists, it's just overestimated. Kahneman's new book - Thinking Fast and Slow - is an excellent read. http://www.smh.com.au/opinion/in-dumb-luck-we-can-trust-20120127-1qldb.html?skin=text-only http://www.smh.com.au/opinion/in-dumb-luck-we-can-trust-2012...
thelonecabbage 15y ago
And how would the company have performed if they hired a less expensive CEO? Fantanomics.
outside1234 15y ago
i don't know how you could possibly say Steve Ballmer is underpaid for his performance.
forgotAgain 15y ago
It's interesting that the cause for spiraling CEOs salary is similar to the cause of spiraling Civil Service salaries over the past 30 years. In both cases compensation is not based on performance but rather on what others in similar positions are receiving and control of the compensation process. In corporations there will be board compensation committees that hire outside compensation consultants. The consultants will come back with a suggested salary that is the current standard for similar companies plus an additional amount to insure that they "get the best". There are only a small group of such consulting companies and it is in their self interest to inflate executive salaries. Suggesting lower salaries would mean a loss of future business because it is the very same executives that hire them. For civil service contracts their will be independent government boards set up to negotiate salaries. To insure that the boards are independent they are usually constituted using a political process. As a baseline for salaries they will use formulas based on what other unions make plus a little something extra because "well everyone deserves a raise". As with the executive compensation committee, it is in the self interest of the government compensation boards to be generous. The government boards are appointed positions based on the party in power. Given the capabilities of unions in voter organization, it is fair to say that they at least indirectly hire the compensation board members. The net result in both cases is spiraling salaries that have no relation to performance.
- api 15y ago
  The right likes to scream about this phenomenon in civil service. The left likes to scream about it in the private sector. Incredibly good point... it's the same phenomenon. We need -- collectively -- in all spheres -- to take a good look at some people and start asking questions like "what exactly is it that you do here? what value do you create that is commensurate with your salary?" In government this has to happen at the management or political level. In the private sector this needs to happen via shareholder pressure. If shareholders had a brain, they would start agitating for long-term merit-based CEO pay.
  - maratd 15y ago
    The best solution, in both the government and private sector, is to keep things small. Smaller governments and smaller companies. On the small scale, it's very easy to ask "what exactly is it that you do here?" to everyone involved in the entity.
dustingetz 15y ago
my gut reaction was "so what?" the article doesn't attempt to explain. why does this stat matter?
deleted 15y ago
[deleted]
michaelochurch 15y ago
It's actually a steep negative correlation if you take a historical context. In the 1970s, CEO pay was much lower and companies were well run. Now, CEO pay is very high and the results are awful. I explained this "paradox" in a blog post a year and a half ago: http://michaelochurch.wordpress.com/2010/11/22/pay-more-get-less/ http://michaelochurch.wordpress.com/2010/11/22/pay-more-get-...
- thelonecabbage 15y ago
  They also wore more hats. Or the market was different, or they weren't dealing with labor shortages, or their predecessors set the stage differently, or inflation has increased 580% since 1970.... It's not possible to tease out the cause and effect. Fortunately there is an easier way to figure it out; if the businesses are hiring idiots, at far to much money the easy way to tell they are doing it is their stock price will plummet and they will go out of business.
  - masklinn 15y ago
    > or inflation has increased 580% since 1970.... It also has increased for workers, and most comparisons (including Michael's) look at the ratio between top executive comp and average worker comp.
  - CWuestefeld 15y ago
    Or the market was different, or they... A really significant difference that I rarely see acknowledged in these discussions is that the means of compensation has changed drastically in the last few decades. It used to be that executives got part of their compensation through perks like generous expense accounts, or country club memberships, or keys to the executive washroom. Changes in tax laws and other cultural norms have eliminated these as such. But the corporations still need to be able to compete for the same pool of executives, and so the money that had been going into those perks now surfaces as monetary compensation. In other words, much of the apparent increase in salaries is actually just that part of the old-days compensation wasn't reflected as income.
- jgmmo 15y ago
Gustomaximus 15y ago
I recall a study some years back on Australian CEO's of public companies and they found a negative relationship between pay and company performance. I tried to find the article to no avail. This article says no relationship between pay/performance but mentions many previous studies have found a negative correlation: http://www.sef.hku.hk/upload/faculty/42/officer-remuneration.pdf http://www.sef.hku.hk/upload/faculty/42/officer-remuneration...
byrneseyeview 15y ago
Zero correlation is a surprising number. That seems to imply that CEOs are paid fairly; I had thought they were overpaid. If they're underpaid, there should be a positive correlation between CEO pay and corporate performance (i.e. the companies that pay the most can hire the best people). If they're overpaid, there should be an inverse correlation (i.e. the companies that pay the most are likely to overpay the most, and thus waste the most money). So the exact middle ground implies--the exact middle ground. I didn't realize the market was so efficient. The other possibility is that CEO pay or market performance are totally random. But all you need to do is identify a few very effective and very well-paid CEOs to argue that this is false. Just look at e.g. JCP's new CEO (they nabbed him from Apple thanks to, in part, a generous options package). This might be clearer in another context: it wouldn't surprise me to find out that your average hunger in a given day has no correlation to your daily caloric intake. That wouldn't imply that calories don't satiate hunger; it would imply that most of us eat something close to our daily calorie requirement.
- stdbrouw 15y ago
  Even for very highly paid CEOs, you wouldn't expect their remuneration to be much more than a single percent of revenues, and so underperformance as a direct result of overpaying the CEO is unlikely to be an issue for any big company. Statistically, the direct effect of CEO pay on the bottom line is dwarfed by the indirect effect of his/her work on the bottom line, making it hard if not impossible to isolate, and so I don't think these numbers quite tell the story you think they do.
- monkeyfacebag 15y ago
  > all you need to do is identify a few very effective and very well-paid CEOs to argue that this is false No. If there's no correlation between CEO-pay and performance/market cap, finding a few interesting counter-cases doesn't further your argument. Inherent randomness and lack of accounting for other factors are far more likely to be the culprits here than market efficiency. EDIT: Further, zero correlation isn't a "middle-ground" between positive and negative correlation. If it implies anything it's that one variable (performance/market cap) doesn't depend on another. If there's no correlation, CEOs can still be overpaid, they just can't do worse for their companies as pay increases.
polyfractal 15y ago
There is an interesting podcast with Steven Kaplan about the same issue. His research showed a similar result: CEOs are paid fairly and have had wage growth similar to other highly skilled fields (doctors, lawyers, etc). Conversely, he found that hedge fund managers have absolutely skyrocketed past everyone else. They have totally blown past any type of normal wage growth and are the real culprit for the "1%" phenomenon. http://www.econtalk.org/archives/2011/11/kaplan_on_the_i.html http://www.econtalk.org/archives/2011/11/kaplan_on_the_i.htm...
7952 15y ago
I would love to know the break down by type of business. Surely a CEO is more important at a product lead company than a service company?
verelo 15y ago
This makes me think back to the TED talk that discusses that higher pay actually decreased performance and employee motivation when innovation is required. Interesting that the overpaid industries are those that i would consider to be less innovative and those that are considered underpaid are the move innovative industries and companies. That is just my opinion however. http://blog.ted.com/2009/08/24/the_surprising/ http://blog.ted.com/2009/08/24/the_surprising/

76 points by stfu 15y ago

I wonder if they would find a correlation between board members not getting voted out and CEO pay. Maybe shareholders tend to be pleased if boards hire big name CEO's?

wisty 15y ago
Or CEOs who wow the shareholders get rewarded by board members?
jtbigwoo 15y ago
Many companies have what basically amounts to a board exchange where a high-ranking official from company A serves on the board of company B which has an official on company C's board and company C has an official on company A's board. In the end, it has the potential to be an "I'll scratch your back, you scratch mine" arrangement.

talmand 15y ago

And this is a surprise? I didn't need research to determine this, I just kept up with the news.

scott_s 15y ago
http://lesswrong.com/lw/im/hindsight_devalues_science/ http://lesswrong.com/lw/im/hindsight_devalues_science/
- talmand 15y ago
  It's not hindsight as I'm reading the news article that day.
  - scott_s 15y ago
    Yes, it's hindsight because you're reading the conclusions of a study and saying "I could have guessed that." But you didn't know that, you suspected it. The point of doing such studies is to know. I also suspect, but obviously can't demonstrate, that someone would have said the same thing ("I could have told you that") were the conclusion the opposite.
    - deleted 15y ago
      [deleted]

vsl2 15y ago

Conflict of interest where the CEO (or his friends on the board) decide how much to pay him? Say it isn't so.

jbooth 15y ago

I really don't understand why people think any amount of pay over, say, a few million, for any position, makes any difference to anyone. Think about the people you know who are good at their job. Do they give a fuck about money if you give them enough that they're taken care of? No, they probably care a lot more about prestige, interesting problems, other ego-feeders besides a silly 8-digit number. Of course, CEOs are bound to be good negotiators and will negotiate themselves a higher number because why not. But is anyone going to argue that there's a serious quality of life difference between 20 and 100 million?

cynicalkane 15y ago
Like almost every software engineer, I get paid far less than a few million dollars. And like almost every software engineer (the bachelors, anyway) I get paid far more than I "need". But according to many HN articles, if I were to accept a job without negotiating my pay upward as much as is reasonable, I would be a sucker. TBH, if I heard a CEO of a for-profit didn't try to get a higher pay package, I'd be wondering about this CEO's business skill.
- starwed 15y ago
  >TBH, if I heard a CEO of a for-profit didn't try to get a higher pay package, I'd be wondering about this CEO's business skill. That's because you, like all people, suck at thinking rationally. :D
- jbooth 15y ago
  Of course he's gonna negotiate upwards. Someone good at the job of CEO would do so instinctively, because negotiating is a big part of their job and they like to do it well. But it's not what his performance or his quality of life is based on.
- lambersley 15y ago
  The fault isn't being placed on the CEO. He is an individual who seeks personal gain primarily, places family interest and other similar motivators ahead of the needs of the organization he leads. Rather, fingers should be pointed at Boards who agree to ridiculous compensation packages.

cynicalkane 15y ago

The headline is probably true in the statistical sense. The sample size is undoubtedly small and economic data are often tainted by the efficiency effect--the 'experiment' is uncontrolled and actors might already be choosing the results that are best for them, dramatically reducing the apparent statistical effects of their decisions. Finally, CEO pay is often negotiated before performance becomes apparent, and for something like CEO I'd imagine it's really hard to tell how well they'll do in advance, even if you're trying to pick the best people for the job. It's not like there's a CEO aptitude test, it's not like the skills picked up being CEO of Pepsi are necessarily transferable to being CEO of Apple Computer (for example). The headline might also be true in the economic sense. I'm not especially qualified to judge this. The article, however, is quoting the apparently private data of one obscure financial research firm. So I'm filing it under Not News. (I also just noticed that they call Warren Buffet 'underpaid'. The guy earned fifty billion dollars being CEO of Berkshire Hathaway. Calling him 'underpaid' seems like a bit of a technicality.)

JumpCrisscross 15y ago
I think the point is the board should structure pay so that when the company does well the CEO automatically earns more and when it doesn't he doesn't.
- cynicalkane 15y ago
  CEO pay is frequently structured like this already. CEOs will often get half or more of their pay in restricted stock and options, and it's not unheard of for their salary to be a token value like $100 or $1. They also have the incentive of not being fired, and being re-signed if they're on contract. The alleged problem is that the vesting/restriction periods for these stock and options is too short, like a few years. I have a pet idea that CEO pay should be mostly in stock that vests quickly but is restricted for a very long mean time, like 20 years. But that's just a pet idea and I bet it would be a very hard sell to potential CEOs. I also think pay for performance is overrated. It won't help if you have the wrong guy in the first place.
  - 15y ago

brianlouisw 15y ago

Paying CEOs for 'performance' may not be a significant improvement unfortunately. Daniel Kahneman, and Nassim Taleb have spoken about this - essentially that there's no good reason to think CEOs of large companys have any significant control over their company's outcomes. Our judgement is clouded by a combination of hindsight and narrative biases along with a significant underestimation of 'luck'. Kahneman quotes something like a .6 correlation IIRC. So, it CEO performance exists, it's just overestimated. Kahneman's new book - Thinking Fast and Slow - is an excellent read. http://www.smh.com.au/opinion/in-dumb-luck-we-can-trust-20120127-1qldb.html?skin=text-only http://www.smh.com.au/opinion/in-dumb-luck-we-can-trust-2012...

thelonecabbage 15y ago

And how would the company have performed if they hired a less expensive CEO? Fantanomics.

outside1234 15y ago

i don't know how you could possibly say Steve Ballmer is underpaid for his performance.

forgotAgain 15y ago

It's interesting that the cause for spiraling CEOs salary is similar to the cause of spiraling Civil Service salaries over the past 30 years. In both cases compensation is not based on performance but rather on what others in similar positions are receiving and control of the compensation process. In corporations there will be board compensation committees that hire outside compensation consultants. The consultants will come back with a suggested salary that is the current standard for similar companies plus an additional amount to insure that they "get the best". There are only a small group of such consulting companies and it is in their self interest to inflate executive salaries. Suggesting lower salaries would mean a loss of future business because it is the very same executives that hire them. For civil service contracts their will be independent government boards set up to negotiate salaries. To insure that the boards are independent they are usually constituted using a political process. As a baseline for salaries they will use formulas based on what other unions make plus a little something extra because "well everyone deserves a raise". As with the executive compensation committee, it is in the self interest of the government compensation boards to be generous. The government boards are appointed positions based on the party in power. Given the capabilities of unions in voter organization, it is fair to say that they at least indirectly hire the compensation board members. The net result in both cases is spiraling salaries that have no relation to performance.

api 15y ago
The right likes to scream about this phenomenon in civil service. The left likes to scream about it in the private sector. Incredibly good point... it's the same phenomenon. We need -- collectively -- in all spheres -- to take a good look at some people and start asking questions like "what exactly is it that you do here? what value do you create that is commensurate with your salary?" In government this has to happen at the management or political level. In the private sector this needs to happen via shareholder pressure. If shareholders had a brain, they would start agitating for long-term merit-based CEO pay.
- maratd 15y ago
  The best solution, in both the government and private sector, is to keep things small. Smaller governments and smaller companies. On the small scale, it's very easy to ask "what exactly is it that you do here?" to everyone involved in the entity.

dustingetz 15y ago

my gut reaction was "so what?" the article doesn't attempt to explain. why does this stat matter?

deleted 15y ago

[deleted]

michaelochurch 15y ago

It's actually a steep negative correlation if you take a historical context. In the 1970s, CEO pay was much lower and companies were well run. Now, CEO pay is very high and the results are awful. I explained this "paradox" in a blog post a year and a half ago: http://michaelochurch.wordpress.com/2010/11/22/pay-more-get-less/ http://michaelochurch.wordpress.com/2010/11/22/pay-more-get-...

thelonecabbage 15y ago
They also wore more hats. Or the market was different, or they weren't dealing with labor shortages, or their predecessors set the stage differently, or inflation has increased 580% since 1970.... It's not possible to tease out the cause and effect. Fortunately there is an easier way to figure it out; if the businesses are hiring idiots, at far to much money the easy way to tell they are doing it is their stock price will plummet and they will go out of business.
- masklinn 15y ago
  > or inflation has increased 580% since 1970.... It also has increased for workers, and most comparisons (including Michael's) look at the ratio between top executive comp and average worker comp.
- CWuestefeld 15y ago
  Or the market was different, or they... A really significant difference that I rarely see acknowledged in these discussions is that the means of compensation has changed drastically in the last few decades. It used to be that executives got part of their compensation through perks like generous expense accounts, or country club memberships, or keys to the executive washroom. Changes in tax laws and other cultural norms have eliminated these as such. But the corporations still need to be able to compete for the same pool of executives, and so the money that had been going into those perks now surfaces as monetary compensation. In other words, much of the apparent increase in salaries is actually just that part of the old-days compensation wasn't reflected as income.
jgmmo 15y ago

Gustomaximus 15y ago

I recall a study some years back on Australian CEO's of public companies and they found a negative relationship between pay and company performance. I tried to find the article to no avail. This article says no relationship between pay/performance but mentions many previous studies have found a negative correlation: http://www.sef.hku.hk/upload/faculty/42/officer-remuneration.pdf http://www.sef.hku.hk/upload/faculty/42/officer-remuneration...

byrneseyeview 15y ago

Zero correlation is a surprising number. That seems to imply that CEOs are paid fairly; I had thought they were overpaid. If they're underpaid, there should be a positive correlation between CEO pay and corporate performance (i.e. the companies that pay the most can hire the best people). If they're overpaid, there should be an inverse correlation (i.e. the companies that pay the most are likely to overpay the most, and thus waste the most money). So the exact middle ground implies--the exact middle ground. I didn't realize the market was so efficient. The other possibility is that CEO pay or market performance are totally random. But all you need to do is identify a few very effective and very well-paid CEOs to argue that this is false. Just look at e.g. JCP's new CEO (they nabbed him from Apple thanks to, in part, a generous options package). This might be clearer in another context: it wouldn't surprise me to find out that your average hunger in a given day has no correlation to your daily caloric intake. That wouldn't imply that calories don't satiate hunger; it would imply that most of us eat something close to our daily calorie requirement.

stdbrouw 15y ago
Even for very highly paid CEOs, you wouldn't expect their remuneration to be much more than a single percent of revenues, and so underperformance as a direct result of overpaying the CEO is unlikely to be an issue for any big company. Statistically, the direct effect of CEO pay on the bottom line is dwarfed by the indirect effect of his/her work on the bottom line, making it hard if not impossible to isolate, and so I don't think these numbers quite tell the story you think they do.
monkeyfacebag 15y ago
> all you need to do is identify a few very effective and very well-paid CEOs to argue that this is false No. If there's no correlation between CEO-pay and performance/market cap, finding a few interesting counter-cases doesn't further your argument. Inherent randomness and lack of accounting for other factors are far more likely to be the culprits here than market efficiency. EDIT: Further, zero correlation isn't a "middle-ground" between positive and negative correlation. If it implies anything it's that one variable (performance/market cap) doesn't depend on another. If there's no correlation, CEOs can still be overpaid, they just can't do worse for their companies as pay increases.

polyfractal 15y ago

There is an interesting podcast with Steven Kaplan about the same issue. His research showed a similar result: CEOs are paid fairly and have had wage growth similar to other highly skilled fields (doctors, lawyers, etc). Conversely, he found that hedge fund managers have absolutely skyrocketed past everyone else. They have totally blown past any type of normal wage growth and are the real culprit for the "1%" phenomenon. http://www.econtalk.org/archives/2011/11/kaplan_on_the_i.html http://www.econtalk.org/archives/2011/11/kaplan_on_the_i.htm...

7952 15y ago

I would love to know the break down by type of business. Surely a CEO is more important at a product lead company than a service company?

verelo 15y ago

This makes me think back to the TED talk that discusses that higher pay actually decreased performance and employee motivation when innovation is required. Interesting that the overpaid industries are those that i would consider to be less innovative and those that are considered underpaid are the move innovative industries and companies. That is just my opinion however. http://blog.ted.com/2009/08/24/the_surprising/ http://blog.ted.com/2009/08/24/the_surprising/