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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

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.
- snapplebobapple 3y ago
  I think you're missing/misunderstanding the mechanism for the above. Boards willfully don't know much of anything at a large corp (especially with all the DEI nonsense putting even less competent people on the board). You have to remember that this is an infinitely repeating game and there's basically only two board member strategies at play and they depend on whether there is a single large and involved shareholding block or not. if there is a large shareholding block actively involved you can play the competent and possibly disagreeable board member strategy because your tenure on the board is based on keeping the involved shareholder happy and voting for you. If there is no large and involved shareholding block (i.e. many, many large companies today) then the winning board member strategy is getting management to keep recommending you because an overwhelming majority of the time the uninvolved smaller shareholders vote management recommendation. You want a board to behave like the first scenario, but it's usually the second scenario you are in. As the game repeats that translates to higher comp to the ceo and to the board (since the ceo recommends his buddies deserve more comp) and the board basically tries to side with the ceo as far as it can without incurring personal legal liability and as long as that ceo doesn't underperform in a way that is publicly embarassing they can often hold on for several years and make out with millions while the board gets decent comp for almost no work. I don't think you can easily fix this but I do notice that many of these companies are pretty clearly oligopolists under the pre-rehnquist definition so the solution could take the form of breaking these large companies up until the smaller companies do end up with a share holding block that both cares and is big enough to discipline the board and ceo.
- freeopinion 3y ago
  Boards are often composed of failed or failing CEOs, celebrities, and others with questionable management skills. Let's say you are on the board of Apple and you are looking at Tim Cook's retirement. Would you look at a Senior VP from Microsoft? An Associate COO of Intel? The former CTO of Ford Motors? A department head at Via? Ryan Reynolds? The CFO of Apple? The person who was Jim Keller's coworker at Harris and DEC, and worked two levels below Jim Keller at AMD and SiByte? Can you or anybody put in writing what qualities a prospective CEO of Apple should possess that would differentiate one of these candidates above the others? Let's say you are Al Gore or Al Gorsky. How do you decide who to hire?
  - raizer88 3y ago
    Boards don't do the researching part but headhunters. Then the board choose the pick from a nice pptx.
    - freeopinion 3y ago
      I claim that headhunters can't do it either. Nor can anybody else.
fallingknife 3y ago
This trope of destroying the company for short term gains and raising the stock price gets trotted out all the time. But can you even provide an example of it? It's not like wall st is made up of complete idiots who are going to keep falling for that.
- raizer88 3y ago
  Unity game engine
  - fallingknife 3y ago
    Looks like they have never turned a profit, so how is this an example?
    - Jochim 3y ago
      CEO has a track record of making damaging statements. CEO pushes though decision on a monetisation plan so stupid that people are screaming internally about it before it's released. The changes in question destroy the brand's reputation and decades of goodwill. Many customers actively port their games away. It's characteristic of short term thinking. The only concern is "what might raise revenue this quarter". If they'd thought beyond that they'd have seen that the damage to the brand is likely to be far more costly. This line of thinking seems to have become pervasive. No thought is given to producing something people want to pay for. Instead, they squeeze until people get fed up and the product dies.
      - fallingknife 3y ago
        But by your theory this short term decision making would be rewarded by an increase in profits and the share price. It hasn't been. This is just a case of bad management being punished by the stock market as it should be. The system is working here. Edit: not your theory, but the commenter I was replying to above.
  - dagw 3y ago
mitthrowaway2 3y ago
The author mentions the stock options, which create incentive for success, but points out that the problem is no downside risk. Golden parachutes are counter to those incentives.
- AlbertCory 3y ago
  Thank you. "Skin" is risk, not just reward.
  - fastball 3y ago
    The risk is supposed to be your comp going down if you make the stock price go down.
    - mitthrowaway2 3y ago
      > Yes, the Board can arrange it so they make a lot of money if the company does well, but if it tanks, they’ll still be OK. Here are some examples[...] Do you disagree with this thesis?
    - AlbertCory 3y ago
      No, "your comp going down" is not "risk."
      - fastball 3y ago
        So is a founder that owns 100% of their company not exposed to "risk" because the worst that can happen is the value of the thing they have goes down? What exactly is risk to you? Losing a hand if the company does poorly?
        mitthrowaway2 3y ago
        Depends on the founder's situation, whether they're independently wealthy and whether their investors (if any) have taken on some of the risk. But for some bootstrappers, they get next to no salary and if their company fails, they might lose their house and be unable to feed their family. They're truly all-in. That's not going to happen with the first example from the article: > Fiorina received a larger signing offer than any of her predecessors, including: US$65 million in restricted stock to compensate her for the Lucent stock and options she left behind, a US$3 million signing bonus, a US$1 million annual salary (plus a US$1.25–US$3.75 million annual bonus), US$36,000 in mortgage assistance, a relocation allowance, and permission (and encouragement) to use company planes for personal affairs.

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.
snapplebobapple 3y ago
I think you're missing/misunderstanding the mechanism for the above. Boards willfully don't know much of anything at a large corp (especially with all the DEI nonsense putting even less competent people on the board). You have to remember that this is an infinitely repeating game and there's basically only two board member strategies at play and they depend on whether there is a single large and involved shareholding block or not. if there is a large shareholding block actively involved you can play the competent and possibly disagreeable board member strategy because your tenure on the board is based on keeping the involved shareholder happy and voting for you. If there is no large and involved shareholding block (i.e. many, many large companies today) then the winning board member strategy is getting management to keep recommending you because an overwhelming majority of the time the uninvolved smaller shareholders vote management recommendation. You want a board to behave like the first scenario, but it's usually the second scenario you are in. As the game repeats that translates to higher comp to the ceo and to the board (since the ceo recommends his buddies deserve more comp) and the board basically tries to side with the ceo as far as it can without incurring personal legal liability and as long as that ceo doesn't underperform in a way that is publicly embarassing they can often hold on for several years and make out with millions while the board gets decent comp for almost no work. I don't think you can easily fix this but I do notice that many of these companies are pretty clearly oligopolists under the pre-rehnquist definition so the solution could take the form of breaking these large companies up until the smaller companies do end up with a share holding block that both cares and is big enough to discipline the board and ceo.
freeopinion 3y ago
Boards are often composed of failed or failing CEOs, celebrities, and others with questionable management skills. Let's say you are on the board of Apple and you are looking at Tim Cook's retirement. Would you look at a Senior VP from Microsoft? An Associate COO of Intel? The former CTO of Ford Motors? A department head at Via? Ryan Reynolds? The CFO of Apple? The person who was Jim Keller's coworker at Harris and DEC, and worked two levels below Jim Keller at AMD and SiByte? Can you or anybody put in writing what qualities a prospective CEO of Apple should possess that would differentiate one of these candidates above the others? Let's say you are Al Gore or Al Gorsky. How do you decide who to hire?
- raizer88 3y ago
  Boards don't do the researching part but headhunters. Then the board choose the pick from a nice pptx.
  - freeopinion 3y ago
    I claim that headhunters can't do it either. Nor can anybody else.

fallingknife 3y ago

This trope of destroying the company for short term gains and raising the stock price gets trotted out all the time. But can you even provide an example of it? It's not like wall st is made up of complete idiots who are going to keep falling for that.

raizer88 3y ago
Unity game engine
- fallingknife 3y ago
  Looks like they have never turned a profit, so how is this an example?
  - Jochim 3y ago
    CEO has a track record of making damaging statements. CEO pushes though decision on a monetisation plan so stupid that people are screaming internally about it before it's released. The changes in question destroy the brand's reputation and decades of goodwill. Many customers actively port their games away. It's characteristic of short term thinking. The only concern is "what might raise revenue this quarter". If they'd thought beyond that they'd have seen that the damage to the brand is likely to be far more costly. This line of thinking seems to have become pervasive. No thought is given to producing something people want to pay for. Instead, they squeeze until people get fed up and the product dies.
    - fallingknife 3y ago
      But by your theory this short term decision making would be rewarded by an increase in profits and the share price. It hasn't been. This is just a case of bad management being punished by the stock market as it should be. The system is working here. Edit: not your theory, but the commenter I was replying to above.
- dagw 3y ago

mitthrowaway2 3y ago

The author mentions the stock options, which create incentive for success, but points out that the problem is no downside risk. Golden parachutes are counter to those incentives.

AlbertCory 3y ago
Thank you. "Skin" is risk, not just reward.
- fastball 3y ago
  The risk is supposed to be your comp going down if you make the stock price go down.
  - mitthrowaway2 3y ago
    > Yes, the Board can arrange it so they make a lot of money if the company does well, but if it tanks, they’ll still be OK. Here are some examples[...] Do you disagree with this thesis?
  - AlbertCory 3y ago
    No, "your comp going down" is not "risk."
    - fastball 3y ago
      So is a founder that owns 100% of their company not exposed to "risk" because the worst that can happen is the value of the thing they have goes down? What exactly is risk to you? Losing a hand if the company does poorly?
      - mitthrowaway2 3y ago
        Depends on the founder's situation, whether they're independently wealthy and whether their investors (if any) have taken on some of the risk. But for some bootstrappers, they get next to no salary and if their company fails, they might lose their house and be unable to feed their family. They're truly all-in. That's not going to happen with the first example from the article: > Fiorina received a larger signing offer than any of her predecessors, including: US$65 million in restricted stock to compensate her for the Lucent stock and options she left behind, a US$3 million signing bonus, a US$1 million annual salary (plus a US$1.25–US$3.75 million annual bonus), US$36,000 in mortgage assistance, a relocation allowance, and permission (and encouragement) to use company planes for personal affairs.