6 ms·

What's missing with American CEOs?

73 points by AlbertCory 3y ago

brohee 3y ago
It's hilarious that while discussing getting Nassim Taleb wrong he actually gets it wrong differently...
- rrr_oh_man 3y ago
  Would you elaborate for the uninitiated?
  - endtime 3y ago
    He misspells his name ("Nessim") while talking about how he misordered his first and middle names.
    - raverbashing 3y ago
      Sounds like he Igenvalued himself
- monero-xmr 3y ago
  To be clear, Taleb has never revealed publicly any proof of trades he has conducted, any proof of profits, and he has written books of wisdom without ever showing his data. I consider him a popsci fraud like Dan Ariely - show the data or GTFO
  - antupis 3y ago
    Newton had horrible investments so his theories are bad.
    - monero-xmr 3y ago
      Newton didn’t pretend to be a master of predicting the future of market performance. I trust people like Warren Buffett a lot more than someone who has never proven any skin in the game whatsoever
    - flyfish0108 3y ago
      If his theories are about investments, yes, they are bed. Luckily they are about physics.
  - Animats 3y ago
    Right. Had this argument years ago in Wikipedia. The basic concept of Taleb's Empirica fund was to buy cheap options that were way out of the money in hopes of a "black swan" event. Most of those options expired un-exercised. So the fund lost money most years, but made huge profits in a market crash year. The big question is whether this is a net win over a few business cycles.
    - monero-xmr 3y ago
      The real question is whether the theoretical plan actually existed. He has never proven any of this. I can claim anything future or past but without receipts it’s just intellectual masturbation, not real skin in the game.
    - tazu 3y ago
      Check out Mark Spitznagel.
  - ekianjo 3y ago
    And Taleb wrote a whole book of fluff called Black Swan that had no insight whatsoever and could be summed up in one paragraph
    - yellow_lead 3y ago
      They're like self-health books posing as insightful.
    - monero-xmr 3y ago
      It’s great if you received wisdom from his fiction books but if you actually think he has made any profits whatsoever from his trading advice you are going to wind up empty handed. It’s like learning a great writer of crime novels is actually a housewife from Missouri - a great imagination, but all of their ideas come from TV.
      - rfrey 3y ago
        To be fair, his first (and best) book was about dynamic pricing of options, and wasn't simply (ahem) derivative like his philosophy stuff.
deleted 3y ago
[deleted]
ajkjk 3y ago
Agree with the title but like none of the rest. Do they think that people joining family businesses do a good job somehow? There are countless stories of people inheriting things and ruining them because they don't have the acumen of the original creator. But basically agree that, yes, CEOs don't have skin in the game. In fact almost everyone in big corporations doesn't. It seems to become more about not taking risks that would be socially embarrassing than about doing a good job. But what could give them "skin"? Maybe fierce competition? But that's kinda lame. With efficiency gains from technology we should be able to live in a world that's not based around fierce competition. Better than that is fierce accountability. From who? Everyone you can think of. In particular, accountability that they do their jobs right, make the right choices, charge fair prices, treat employees well, treat society and the earth well, etc. If you think about it... there is no reason in principle that corporations ought to be secretive. Since they should be competing on "honest work", not on tricking and one-upping each other, it seems to me that they should be entirely open and judged for their daily behavior. The trick, of course, is giving that accountability any teeth.
- tstrimple 3y ago
  > There are countless stories of people inheriting things and ruining them because they don't have the acumen of the original creator. Some of my most "entertaining" work experiences have been a direct result of this. In the latest example, the son of the founder went so far as to create a motorcycle dealership on the property of his completely unrelated inherited business in the parking lot of their HQ location because he was more interested in motorcycles than the business he inherited. This is a relatively small family company ($250MM/year net) that also has multiple private jets for the C-Suite of friends of the inheritor to ride around in. One of the most moral crushing experiences is when everyone sees the direction a company is taking, but we all still go through the steps we all know will be futile regardless because the money all spends the same in the end.
- darth_avocado 3y ago
  The problem is that in the current era, we only look at short term profits and losses, which makes it difficult to evaluate competency. The comparison of CEO vs Owner/Founder/Guy with the name on the company, should be looked from the short/long term benefits to the company. A lot of CEOs are compensated based on stock value and quarterly results, which can be gamed quite easily. You can improve profit margins if you fire half your staff, but will that ensure your company lasts a decade? Probably not. Once you take a long term view, you can align the incentives that way, and automatically ensure the CEOs have more skin in the game. E.g. instead of $3M joining bonus, move it to a bonus if you’re still a CEO after 3 years.
DrDroop 3y ago
Most CEO have stock options so in theory they have skin in the game. This however does not make them rational or competent actors. Maybe skin in the game isn't all that it is being made out to be, it is probably necessary but not sufficient to be a effective business leader. Honestly this article feels strangely malicious, I would not call the execution of more then 300 soviet officers an example of skin in the game, but just cruel intimidation by Stalin.
- danjac 3y ago
  Particularly as Stalin himself wilfully ignored intelligence about the imminent Operation Barbarossa, for example from the agent Richard Sorge. And he executed hundreds of capable officers in the 1930s, replacing them with incompetent yes-men, which greatly degraded Soviet defences. In Western corporate terms, Stalin would be a boss who carried out mass layoffs of his most competent employees, ignored the threat of a competitor, and only survived due to the hard work and sacrifice of his remaining underlings, while taking credit for their work. All in all, he'd probably be quite a good modern American CEO.
- dclowd9901 3y ago
  The “skin” is not related to the value of the product they deliver or the happiness of the employees or the long term viability of the company. So it can hardly be valuable “skin”.
Animats 3y ago
The other side of this argument is that if CEOs are exposed to high personal risks, they manage very conservatively. That's when companies get left behind change. Consider Kodak.
- ekianjo 3y ago
  Were Kodak CEOs subject to such pressures or are you making this up?
  - Animats 3y ago
    No, it's just that Kodak died from excessively conservative management. They had the first digital camera and went nowhere with it.
hotnfresh 3y ago
Relatedly—I’ve been thinking on this—I’d like to introduce (if no one else has already?) a term in the spirit of “marginal utility of income”: Marginal reality of risk. Big shot CEO’s bad outcome if they get fired for doing a terrible job is they are still rich. Assuming they’re not outright criminals, and also happen to get caught and punished for that, anyway. Is Musk doomed to get whatever normal 9-5 job he can land if things go so horribly with his investments and endeavors that he loses everything? No. No matter what, he’ll never again work a real job if he doesn’t want to. His fame/infamy is bankable enough he’ll never need a real job to make decent money. He’ll live well and his kids will go to fancy prep schools and all that. His worst likely case (short of, like, going to prison—talking pure risk to his finances) is better than the best likely outcome for nearly everyone else in the world. The marginal reality of risk, above a certain level, approaches zero. The numbers are big, but the risk is a fantasy. The average poor immigrant is taking more real risk than any of these people do, sometimes in their whole lives, every day. Even the average pampered software developer does.
- gmt2027 3y ago
  Absolutely agree with this. Real skin in the game would require CEOs and executives to face ruin in the event of failure. Pilots have skin in the game. There is rarely any doubt that their priority is landing that plane safely. Now imagine a world where airline pilots are able to safely eject with a golden parachute and minimal damage to their professional reputation. What are the chances of achieving the same safety record?
bradley13 3y ago
His closing comment might be one approach: force upper management to make a substantial, long-term investment in the company. An alternate approach would be regulation: outlawing outsized compensation. If the top dog really did only earn 50x the janitor's salary, we could eliminate an entire class of parasite. A third approach would require cultural change. Regard managers as necessary but low-status. The people doing the actual work of the company should be held in higher regard - and earn more - than the paper shufflers.
- seer 3y ago
  The Mars trilogy offered a few very interesting ideas of economics. Since its a new place people are free to experiment with newer more radical power structures and economic approaches. What the author proposed and explored was a mandatory investment the compony you work for. E.g there are no employees at all just shareholders, and the minimum share you can have is regulated, thus limiting the size and structure of any organization. To be “employed” you have to buy into the company. Since you have advance automation in the universe of the books it seemed actually possible. All fascinating ideas, their implications, upsides and downsides were explored in the trilogy. And I’ve wondered since, can this be a solution to a lot of our current woes, with automation looming as a potential societal issue as well?
- fallingknife 3y ago
  How can you outlaw paying more than 50x to a CEO? Aside from the blatant government overreach, how would you even make it work? What if the equity ends up being worth more than that? If you solve that by not paying in equity, but only cash, now you have an even bigger incentive alignment problem.
  - johnnyanmac 3y ago
    >How can you outlaw paying more than 50x to a CEO? Through congress? There's nothing in the constitution against wages at all. >What if the equity ends up being worth more than that? If you solve that by not paying in equity, but only cash, now you have an even bigger incentive alignment problem. These people spend years undermining the working class and finding all sort of financial loopholes, I'm sure they can take non-cash benefits into account when drafting such a law. I don't think they will actually do so, but it's far from the realm of impossibility. e.g. for equity: you set a similar cap on RSUs and require all full time employees to get a certain amount. a CEO can hold no more than X times the amount of RSUs as your lowest paid employee and a portion of gains in RSUs are pooled into some other system to distribute per year as an end of year bonus (remember when that was the norm?). It's not perfect and I see two obvious holes here (contractors and part time workers), but this is from 5 minutes of brainstorming from a non-economics expert.
MattGaiser 3y ago
Would investors really want substantial downside for CEOs? Over the past two decades, they have demanded more risk and more growth and rewarded doing anything to grow quickly. And for those investors who took the biggest risks and demanded the most growth and boldness, the tech venture capitalists (who endorsed crazy growth strategies and paid valuations everyone else thought were insane), there have been tremendous rewards. VCs are pretty open about wanting to back 50 companies and knowing that 45 will go to zero, 5 will make a bit of money, and 1 will make so much money as to make the rest forgettable. But they need all chasing that mega exit for it all to work out. Add in that America is by far the best major market for generating investor return at the moment and a lot of it is that the American market embraces risk in a way that no others do. There are VCs on this board. Would you want your founders to be sent to sell timeshares if their startups failed?
sashank_1509 3y ago
For every example this article gives, there are so many counter examples that it feels like his entire theory is bunk. Yes, having skin in the game is good, that almost is a tautology but do CEO’s truly not have a skin in the game? There are far more successful CEO run corporations compared to family run corporations. Satya Nadella has been instrumental in Microsoft’s resurgence, but it’s very possible that Satya could have done a bad job, got a fat severance, write books and joined other company boards instead. Would you have gotten better work from Satya, if you could threaten to publicly humiliate him if he failed? I predict not. In fact this article tries to create a simple rule for a problem that has plagued humanity since its existence and will continue plaguing humanity. This is of course the problem of choosing a good leader for a company. A good leader will lead the company well, a bad leader will drive it to the ground and then save his skin when he has to. Of course you can try encouraging bad leaders to be good by forcing them to have skin in the game, but you’re better off just finding a good CEO instead. Determining whether a candidate will be a good CEO is a matter of judgement and cannot be algorithmically solved unfortunately. This is where the quality of a company’s board is important, a low quality board will be unable to even find the person that can right a sinking ship
- dclowd9901 3y ago
  I think you would struggle to find examples of CEOs seeing negative consequences from poor performance that wasn’t outright fraud.
  - fallingknife 3y ago
    What negative consequences would you propose? Isn't firing enough just like for every other job?
    - johnnyanmac 3y ago
      The article highlights some at the end for exploration (I also left a summary on another reply if you want a TLDR). But to tread new ground: not really. Firing is scary for a regular employee because they need to work to live, pay off debts, potentially care for family, and more. Many can't just take off a year without these finances without losing some of these factors. For many still, even a few months of no income can have heavy impacts, especially if we step outside our HN tech bubble. A quick google tells me that the median CEO makes 20 million a year. they really don't need to work a day in their lives after a mere year or 2 of work. All the above financial factors simply aren't a thing unless their quality of life is insanely lavish (like, a full time crew managing a yatch lavish). What's more, their severance is again, usually in the millions. they get rewarded for failing more money than your average worker will make in their career. I don't have an answer (none of the answers in the article are particularly good), but we can start by snipping those parachutes out of contracts. Severance's goal is to minimize financial impact to employees when a company downsizes. your average CEO does not have financial impact that a middle class worker would take any sympathies toward.
freeopinion 3y ago
There are two main reasons for giving employees stock options and one of them is precisely the idea of creating "skin in the game". The author provides examples of CEOs whose stock options amount to millions of dollars after they are fired. So the author complains that CEOs don't have skin in the game and demonstrates this by explaining how the skin they have in the game makes them extremely wealthy. Sometimes, the incentives from "skin in the game" lead to perverse business decisions. Want to drive a stock price up? Fire 50% of the employees and show that your earnings per employee increased 75%. Nevermind that those numbers indicate that your earnings decreased dramatically. Your _profit_ increased substantially in the first six months after the layoffs. The value of the CEO's shares goes up, and the skin they have in the game makes them a lot of money. The stock doesn't correct as quickly as CEOs come and go. Even in the example of HP's big one-day jump after Fiorina left. As for family run businesses, most of the the TV references were over my head. I haven't watched any of those shows. But I can offer an age-old story I am familiar with. It often goes by the name of "The Prodigal Son". It defies almost all of the author's reasoning.
fastball 3y ago
Misses the mark. CEOs absolutely have skin in the game, in that most comp packages include a hefty helping of stock options. But there are a number of problems with how the current system works in practice: 1. Stock options aren't long-term enough – a CEO can make a series of decisions which increase profits and therefore increase stock price in the short-term, but completely hamstring the long-term viability of a company. Doesn't matter though, the CEO already made their bag and moved on. 2. Even when the chickens come home to roost when the CEO is still there, the market is not properly punishing underperforming CEOs. For whatever reason (I have a number of theories), a CEO can do an objectively poor job, leave their current position, and then somehow end up at a different company in a similar position of power not long after. You have to do a really, truly terrible job and even then you might not be out (just look at Adam Neumann). 3. Comp is so high these days (because the multinational corps have gotten so big even when the number of CEOs per company mostly has remained at 1) that even if you do somehow (a) torpedo your stock options and (b) become unemployable, you were probably making enough that you can live out your days very comfortably if necessary.
- dclowd9901 3y ago
  I’d like to hear your reasons for #2. Here’s mine: CEO is largely a figurehead position. Boards know quite well that CEOs aren’t the clock maker toiling away at creating perfection. They have very talented senior staff, middle managers and individual contributors that actually make it happen. However, boards know the market doesn’t give a flying shit about those people. Boards know that CEOs carry a certain political weight in their very presence, and so they have to make their comp packages as attractive as possible so they have the best chance at attracting the best CEOs, because if they do, they know the market will respond positively. If a good CEO sees Company X sending their poor performing leader packing without a golden parachute, there’s no way he’s going to go there. If the market sees the same thing, they’re going to think the same thing. It’s all one big emperors new clothes bullshit show.
  - fastball 3y ago
    Yeah, figurehead is definitely part of it. Kinda like when you hire a consulting firm to tell you about problems you already knew existed. They're not actually telling you anything new, they just provide useful cover for whatever actions you already wanted to take. Also: - Nepotism / boy's club – everybody is kinda friends / in the same circle. Once you get in, you're mostly in for life. - Modern financial instruments allow the smartest person in the room (i.e. hedge funds, etc) to make money on either side of the inflection point. Doesn't matter if a bad CEO tanks the stock price if you expected that to happen and are the one with puts while the rubes (retail investors) are holding the dwindling stock.
noam_compsci 3y ago
We seem to go in a circle: CEOs “don’t have skin in the game” —> more share based comp —> Stock does well. Decry excessive CEO comp —> Depeg ceo pay from stock —> repeat
helsinkiandrew 3y ago
Any competent hiring committee would see someone that's experienced failure as a good hire, any fool can manage a great product to a bit more success, but understanding why things fail and being able to make tough decisions is priceless. This is why traders/bankers who have lost fortunes (even fraudulently) usually land on their feet. For every CEO or professional manager who didn't have "skin in the game" and failed there a probably 100's of incompetent children who drive a family business into the ground and manager owned businesses working at subsistance levels.
- dclowd9901 3y ago
  Your last point is surely salient. But your first point is not. If I have a choice between a ceo who’s run 5 companies and 4 of them well vs one that’s run 5 companies and 1 of them well, I don’t really want the one who’s “learned a lot.”
  - helsinkiandrew 3y ago
    > If I have a choice between a ceo who’s run 5 companies and 4 of them well vs one that’s run 5 companies and 1 of them well Sure, but the likelyhood is that you'll have candidates that have a few senior positions and been CEO once or twice before. In that case one that's failed building a new company/product is no worse than someone that has been the CEO of an established company for a few years and it hasn't gone bust. EDIT: I didn't mean to say that a failed CEO was better than a successful one - just that being a failed CEO won't bar you from being employed again, for good reason.
corethree 3y ago
It's not just about tying the success of the company to the success of the CEO. It's about tying criminal responsibility to the CEO and the board. When the company commits a crime, the corporation doesn't go to jail. Instead the corporation pays a fine. Thus in this sense the company barely loses anything and the CEO and board typically doesn't lose much. I say fuck that. Throw the CEO or the board into jail. That will end some of the criminal negligence we see from corporations today. You do shit like this, you associate acts of evil, acts of crime with the names of board members and CEO's you will fix a lot of shit. A lot.
freeopinion 3y ago
Here's a thought to add to the discussion. What are the consequences to the person or persons who hired the disastrous CEO? What if the CEO's severance benefits were paid out of the combined compensation of the people who gave that CEO those benefits? What skin do they have in the game? There is some idea that nobody getting paid $200,000/year could possibly be qualified to run a $billion company. There are plenty of people making less than that who think they are qualified. But they've never done it. To reach the top you have to work through multiple levels of management. Each of those levels comes with a pay bump. So you make $80K, then $120K, then $180K, then $300K before you can even be considered for the $800K job. This leads to the obvious miscalculation that anybody who has made $800K in the past is a qualified exec. Even assuming that a person was a competent manager at the $180K level or the $400K level, you still have to recognize how often the Peter Principle holds true.
Djeman 3y ago
You can't have worse example than Japan for managment. They're whole auto industry is currently in jeopardy because of short term risk aversion and being too slow to move into EV segment.

73 points by AlbertCory 3y ago

brohee 3y ago

It's hilarious that while discussing getting Nassim Taleb wrong he actually gets it wrong differently...

rrr_oh_man 3y ago
Would you elaborate for the uninitiated?
- endtime 3y ago
  He misspells his name ("Nessim") while talking about how he misordered his first and middle names.
  - raverbashing 3y ago
    Sounds like he Igenvalued himself
monero-xmr 3y ago
To be clear, Taleb has never revealed publicly any proof of trades he has conducted, any proof of profits, and he has written books of wisdom without ever showing his data. I consider him a popsci fraud like Dan Ariely - show the data or GTFO
- antupis 3y ago
  Newton had horrible investments so his theories are bad.
  - monero-xmr 3y ago
    Newton didn’t pretend to be a master of predicting the future of market performance. I trust people like Warren Buffett a lot more than someone who has never proven any skin in the game whatsoever
  - flyfish0108 3y ago
    If his theories are about investments, yes, they are bed. Luckily they are about physics.
- Animats 3y ago
  Right. Had this argument years ago in Wikipedia. The basic concept of Taleb's Empirica fund was to buy cheap options that were way out of the money in hopes of a "black swan" event. Most of those options expired un-exercised. So the fund lost money most years, but made huge profits in a market crash year. The big question is whether this is a net win over a few business cycles.
  - monero-xmr 3y ago
    The real question is whether the theoretical plan actually existed. He has never proven any of this. I can claim anything future or past but without receipts it’s just intellectual masturbation, not real skin in the game.
  - tazu 3y ago
    Check out Mark Spitznagel.
- ekianjo 3y ago
  And Taleb wrote a whole book of fluff called Black Swan that had no insight whatsoever and could be summed up in one paragraph
  - yellow_lead 3y ago
    They're like self-health books posing as insightful.
  - monero-xmr 3y ago
    It’s great if you received wisdom from his fiction books but if you actually think he has made any profits whatsoever from his trading advice you are going to wind up empty handed. It’s like learning a great writer of crime novels is actually a housewife from Missouri - a great imagination, but all of their ideas come from TV.
    - rfrey 3y ago
      To be fair, his first (and best) book was about dynamic pricing of options, and wasn't simply (ahem) derivative like his philosophy stuff.

deleted 3y ago

[deleted]

ajkjk 3y ago

Agree with the title but like none of the rest. Do they think that people joining family businesses do a good job somehow? There are countless stories of people inheriting things and ruining them because they don't have the acumen of the original creator. But basically agree that, yes, CEOs don't have skin in the game. In fact almost everyone in big corporations doesn't. It seems to become more about not taking risks that would be socially embarrassing than about doing a good job. But what could give them "skin"? Maybe fierce competition? But that's kinda lame. With efficiency gains from technology we should be able to live in a world that's not based around fierce competition. Better than that is fierce accountability. From who? Everyone you can think of. In particular, accountability that they do their jobs right, make the right choices, charge fair prices, treat employees well, treat society and the earth well, etc. If you think about it... there is no reason in principle that corporations ought to be secretive. Since they should be competing on "honest work", not on tricking and one-upping each other, it seems to me that they should be entirely open and judged for their daily behavior. The trick, of course, is giving that accountability any teeth.

tstrimple 3y ago
> There are countless stories of people inheriting things and ruining them because they don't have the acumen of the original creator. Some of my most "entertaining" work experiences have been a direct result of this. In the latest example, the son of the founder went so far as to create a motorcycle dealership on the property of his completely unrelated inherited business in the parking lot of their HQ location because he was more interested in motorcycles than the business he inherited. This is a relatively small family company ($250MM/year net) that also has multiple private jets for the C-Suite of friends of the inheritor to ride around in. One of the most moral crushing experiences is when everyone sees the direction a company is taking, but we all still go through the steps we all know will be futile regardless because the money all spends the same in the end.
darth_avocado 3y ago
The problem is that in the current era, we only look at short term profits and losses, which makes it difficult to evaluate competency. The comparison of CEO vs Owner/Founder/Guy with the name on the company, should be looked from the short/long term benefits to the company. A lot of CEOs are compensated based on stock value and quarterly results, which can be gamed quite easily. You can improve profit margins if you fire half your staff, but will that ensure your company lasts a decade? Probably not. Once you take a long term view, you can align the incentives that way, and automatically ensure the CEOs have more skin in the game. E.g. instead of $3M joining bonus, move it to a bonus if you’re still a CEO after 3 years.

DrDroop 3y ago

Most CEO have stock options so in theory they have skin in the game. This however does not make them rational or competent actors. Maybe skin in the game isn't all that it is being made out to be, it is probably necessary but not sufficient to be a effective business leader. Honestly this article feels strangely malicious, I would not call the execution of more then 300 soviet officers an example of skin in the game, but just cruel intimidation by Stalin.

danjac 3y ago
Particularly as Stalin himself wilfully ignored intelligence about the imminent Operation Barbarossa, for example from the agent Richard Sorge. And he executed hundreds of capable officers in the 1930s, replacing them with incompetent yes-men, which greatly degraded Soviet defences. In Western corporate terms, Stalin would be a boss who carried out mass layoffs of his most competent employees, ignored the threat of a competitor, and only survived due to the hard work and sacrifice of his remaining underlings, while taking credit for their work. All in all, he'd probably be quite a good modern American CEO.
dclowd9901 3y ago
The “skin” is not related to the value of the product they deliver or the happiness of the employees or the long term viability of the company. So it can hardly be valuable “skin”.

Animats 3y ago

The other side of this argument is that if CEOs are exposed to high personal risks, they manage very conservatively. That's when companies get left behind change. Consider Kodak.

ekianjo 3y ago
Were Kodak CEOs subject to such pressures or are you making this up?
- Animats 3y ago
  No, it's just that Kodak died from excessively conservative management. They had the first digital camera and went nowhere with it.

hotnfresh 3y ago

Relatedly—I’ve been thinking on this—I’d like to introduce (if no one else has already?) a term in the spirit of “marginal utility of income”: Marginal reality of risk. Big shot CEO’s bad outcome if they get fired for doing a terrible job is they are still rich. Assuming they’re not outright criminals, and also happen to get caught and punished for that, anyway. Is Musk doomed to get whatever normal 9-5 job he can land if things go so horribly with his investments and endeavors that he loses everything? No. No matter what, he’ll never again work a real job if he doesn’t want to. His fame/infamy is bankable enough he’ll never need a real job to make decent money. He’ll live well and his kids will go to fancy prep schools and all that. His worst likely case (short of, like, going to prison—talking pure risk to his finances) is better than the best likely outcome for nearly everyone else in the world. The marginal reality of risk, above a certain level, approaches zero. The numbers are big, but the risk is a fantasy. The average poor immigrant is taking more real risk than any of these people do, sometimes in their whole lives, every day. Even the average pampered software developer does.

gmt2027 3y ago
Absolutely agree with this. Real skin in the game would require CEOs and executives to face ruin in the event of failure. Pilots have skin in the game. There is rarely any doubt that their priority is landing that plane safely. Now imagine a world where airline pilots are able to safely eject with a golden parachute and minimal damage to their professional reputation. What are the chances of achieving the same safety record?

bradley13 3y ago

His closing comment might be one approach: force upper management to make a substantial, long-term investment in the company. An alternate approach would be regulation: outlawing outsized compensation. If the top dog really did only earn 50x the janitor's salary, we could eliminate an entire class of parasite. A third approach would require cultural change. Regard managers as necessary but low-status. The people doing the actual work of the company should be held in higher regard - and earn more - than the paper shufflers.

seer 3y ago
The Mars trilogy offered a few very interesting ideas of economics. Since its a new place people are free to experiment with newer more radical power structures and economic approaches. What the author proposed and explored was a mandatory investment the compony you work for. E.g there are no employees at all just shareholders, and the minimum share you can have is regulated, thus limiting the size and structure of any organization. To be “employed” you have to buy into the company. Since you have advance automation in the universe of the books it seemed actually possible. All fascinating ideas, their implications, upsides and downsides were explored in the trilogy. And I’ve wondered since, can this be a solution to a lot of our current woes, with automation looming as a potential societal issue as well?
fallingknife 3y ago
How can you outlaw paying more than 50x to a CEO? Aside from the blatant government overreach, how would you even make it work? What if the equity ends up being worth more than that? If you solve that by not paying in equity, but only cash, now you have an even bigger incentive alignment problem.
- johnnyanmac 3y ago
  >How can you outlaw paying more than 50x to a CEO? Through congress? There's nothing in the constitution against wages at all. >What if the equity ends up being worth more than that? If you solve that by not paying in equity, but only cash, now you have an even bigger incentive alignment problem. These people spend years undermining the working class and finding all sort of financial loopholes, I'm sure they can take non-cash benefits into account when drafting such a law. I don't think they will actually do so, but it's far from the realm of impossibility. e.g. for equity: you set a similar cap on RSUs and require all full time employees to get a certain amount. a CEO can hold no more than X times the amount of RSUs as your lowest paid employee and a portion of gains in RSUs are pooled into some other system to distribute per year as an end of year bonus (remember when that was the norm?). It's not perfect and I see two obvious holes here (contractors and part time workers), but this is from 5 minutes of brainstorming from a non-economics expert.

MattGaiser 3y ago

Would investors really want substantial downside for CEOs? Over the past two decades, they have demanded more risk and more growth and rewarded doing anything to grow quickly. And for those investors who took the biggest risks and demanded the most growth and boldness, the tech venture capitalists (who endorsed crazy growth strategies and paid valuations everyone else thought were insane), there have been tremendous rewards. VCs are pretty open about wanting to back 50 companies and knowing that 45 will go to zero, 5 will make a bit of money, and 1 will make so much money as to make the rest forgettable. But they need all chasing that mega exit for it all to work out. Add in that America is by far the best major market for generating investor return at the moment and a lot of it is that the American market embraces risk in a way that no others do. There are VCs on this board. Would you want your founders to be sent to sell timeshares if their startups failed?

sashank_1509 3y ago

For every example this article gives, there are so many counter examples that it feels like his entire theory is bunk. Yes, having skin in the game is good, that almost is a tautology but do CEO’s truly not have a skin in the game? There are far more successful CEO run corporations compared to family run corporations. Satya Nadella has been instrumental in Microsoft’s resurgence, but it’s very possible that Satya could have done a bad job, got a fat severance, write books and joined other company boards instead. Would you have gotten better work from Satya, if you could threaten to publicly humiliate him if he failed? I predict not. In fact this article tries to create a simple rule for a problem that has plagued humanity since its existence and will continue plaguing humanity. This is of course the problem of choosing a good leader for a company. A good leader will lead the company well, a bad leader will drive it to the ground and then save his skin when he has to. Of course you can try encouraging bad leaders to be good by forcing them to have skin in the game, but you’re better off just finding a good CEO instead. Determining whether a candidate will be a good CEO is a matter of judgement and cannot be algorithmically solved unfortunately. This is where the quality of a company’s board is important, a low quality board will be unable to even find the person that can right a sinking ship

dclowd9901 3y ago
I think you would struggle to find examples of CEOs seeing negative consequences from poor performance that wasn’t outright fraud.
- fallingknife 3y ago
  What negative consequences would you propose? Isn't firing enough just like for every other job?
  - johnnyanmac 3y ago
    The article highlights some at the end for exploration (I also left a summary on another reply if you want a TLDR). But to tread new ground: not really. Firing is scary for a regular employee because they need to work to live, pay off debts, potentially care for family, and more. Many can't just take off a year without these finances without losing some of these factors. For many still, even a few months of no income can have heavy impacts, especially if we step outside our HN tech bubble. A quick google tells me that the median CEO makes 20 million a year. they really don't need to work a day in their lives after a mere year or 2 of work. All the above financial factors simply aren't a thing unless their quality of life is insanely lavish (like, a full time crew managing a yatch lavish). What's more, their severance is again, usually in the millions. they get rewarded for failing more money than your average worker will make in their career. I don't have an answer (none of the answers in the article are particularly good), but we can start by snipping those parachutes out of contracts. Severance's goal is to minimize financial impact to employees when a company downsizes. your average CEO does not have financial impact that a middle class worker would take any sympathies toward.

freeopinion 3y ago

There are two main reasons for giving employees stock options and one of them is precisely the idea of creating "skin in the game". The author provides examples of CEOs whose stock options amount to millions of dollars after they are fired. So the author complains that CEOs don't have skin in the game and demonstrates this by explaining how the skin they have in the game makes them extremely wealthy. Sometimes, the incentives from "skin in the game" lead to perverse business decisions. Want to drive a stock price up? Fire 50% of the employees and show that your earnings per employee increased 75%. Nevermind that those numbers indicate that your earnings decreased dramatically. Your _profit_ increased substantially in the first six months after the layoffs. The value of the CEO's shares goes up, and the skin they have in the game makes them a lot of money. The stock doesn't correct as quickly as CEOs come and go. Even in the example of HP's big one-day jump after Fiorina left. As for family run businesses, most of the the TV references were over my head. I haven't watched any of those shows. But I can offer an age-old story I am familiar with. It often goes by the name of "The Prodigal Son". It defies almost all of the author's reasoning.

fastball 3y ago

Misses the mark. CEOs absolutely have skin in the game, in that most comp packages include a hefty helping of stock options. But there are a number of problems with how the current system works in practice: 1. Stock options aren't long-term enough – a CEO can make a series of decisions which increase profits and therefore increase stock price in the short-term, but completely hamstring the long-term viability of a company. Doesn't matter though, the CEO already made their bag and moved on. 2. Even when the chickens come home to roost when the CEO is still there, the market is not properly punishing underperforming CEOs. For whatever reason (I have a number of theories), a CEO can do an objectively poor job, leave their current position, and then somehow end up at a different company in a similar position of power not long after. You have to do a really, truly terrible job and even then you might not be out (just look at Adam Neumann). 3. Comp is so high these days (because the multinational corps have gotten so big even when the number of CEOs per company mostly has remained at 1) that even if you do somehow (a) torpedo your stock options and (b) become unemployable, you were probably making enough that you can live out your days very comfortably if necessary.

dclowd9901 3y ago
I’d like to hear your reasons for #2. Here’s mine: CEO is largely a figurehead position. Boards know quite well that CEOs aren’t the clock maker toiling away at creating perfection. They have very talented senior staff, middle managers and individual contributors that actually make it happen. However, boards know the market doesn’t give a flying shit about those people. Boards know that CEOs carry a certain political weight in their very presence, and so they have to make their comp packages as attractive as possible so they have the best chance at attracting the best CEOs, because if they do, they know the market will respond positively. If a good CEO sees Company X sending their poor performing leader packing without a golden parachute, there’s no way he’s going to go there. If the market sees the same thing, they’re going to think the same thing. It’s all one big emperors new clothes bullshit show.
- fastball 3y ago
  Yeah, figurehead is definitely part of it. Kinda like when you hire a consulting firm to tell you about problems you already knew existed. They're not actually telling you anything new, they just provide useful cover for whatever actions you already wanted to take. Also: - Nepotism / boy's club – everybody is kinda friends / in the same circle. Once you get in, you're mostly in for life. - Modern financial instruments allow the smartest person in the room (i.e. hedge funds, etc) to make money on either side of the inflection point. Doesn't matter if a bad CEO tanks the stock price if you expected that to happen and are the one with puts while the rubes (retail investors) are holding the dwindling stock.

noam_compsci 3y ago

We seem to go in a circle: CEOs “don’t have skin in the game” —> more share based comp —> Stock does well. Decry excessive CEO comp —> Depeg ceo pay from stock —> repeat

helsinkiandrew 3y ago

Any competent hiring committee would see someone that's experienced failure as a good hire, any fool can manage a great product to a bit more success, but understanding why things fail and being able to make tough decisions is priceless. This is why traders/bankers who have lost fortunes (even fraudulently) usually land on their feet. For every CEO or professional manager who didn't have "skin in the game" and failed there a probably 100's of incompetent children who drive a family business into the ground and manager owned businesses working at subsistance levels.

dclowd9901 3y ago
Your last point is surely salient. But your first point is not. If I have a choice between a ceo who’s run 5 companies and 4 of them well vs one that’s run 5 companies and 1 of them well, I don’t really want the one who’s “learned a lot.”
- helsinkiandrew 3y ago
  > If I have a choice between a ceo who’s run 5 companies and 4 of them well vs one that’s run 5 companies and 1 of them well Sure, but the likelyhood is that you'll have candidates that have a few senior positions and been CEO once or twice before. In that case one that's failed building a new company/product is no worse than someone that has been the CEO of an established company for a few years and it hasn't gone bust. EDIT: I didn't mean to say that a failed CEO was better than a successful one - just that being a failed CEO won't bar you from being employed again, for good reason.

corethree 3y ago

It's not just about tying the success of the company to the success of the CEO. It's about tying criminal responsibility to the CEO and the board. When the company commits a crime, the corporation doesn't go to jail. Instead the corporation pays a fine. Thus in this sense the company barely loses anything and the CEO and board typically doesn't lose much. I say fuck that. Throw the CEO or the board into jail. That will end some of the criminal negligence we see from corporations today. You do shit like this, you associate acts of evil, acts of crime with the names of board members and CEO's you will fix a lot of shit. A lot.

freeopinion 3y ago

Here's a thought to add to the discussion. What are the consequences to the person or persons who hired the disastrous CEO? What if the CEO's severance benefits were paid out of the combined compensation of the people who gave that CEO those benefits? What skin do they have in the game? There is some idea that nobody getting paid $200,000/year could possibly be qualified to run a $billion company. There are plenty of people making less than that who think they are qualified. But they've never done it. To reach the top you have to work through multiple levels of management. Each of those levels comes with a pay bump. So you make $80K, then $120K, then $180K, then $300K before you can even be considered for the $800K job. This leads to the obvious miscalculation that anybody who has made $800K in the past is a qualified exec. Even assuming that a person was a competent manager at the $180K level or the $400K level, you still have to recognize how often the Peter Principle holds true.

Djeman 3y ago

You can't have worse example than Japan for managment. They're whole auto industry is currently in jeopardy because of short term risk aversion and being too slow to move into EV segment.