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Genuine question: can anyone explain CEO pay to me? I fail to understand why it is commonly accepted that one or a few people can earn n times more than the ave

Genuine question: can anyone explain CEO pay to me? I fail to understand why it is commonly accepted that one or a few people can earn n times more than the average worker actually responsible for creating value. It doesn't seem meritocratic at all... Even in software engineering where we are arguably spoiled to be able to do interesting work possibly from home for upwards of 100k a year, what is the incentive to actually want to do work, if someone else can unjustifiably make 7m a year? So how is it possible that we as humans collectively just accept this, also psychologically speaking?

sackfield 3y ago
What usually happens here is the board of a company say to themselves "Let's hire a professional CEO", the next answer then is how, you don't see these jobs advertised on LinkedIn, so they get a talent recruitment agency. For C level management positions there are usually 2 options that control the most of the market, these 2 options have rosters of people from well known business schools with experience ready to step in. Because the supply is constrained by these companies the CEO pay increases well beyond market rates, as each CEO will earn X% more than the one before it by faking competitiveness, then the former CEOs will complain (as the Mozilla CEO did here) about relative market rates of other CEOs, even though the market rates are set by the cartel that proposed them in the first place. The board not wanting to rock the boat for the shareholders will generally agree to this extortion for optics, and round and round the merry go round goes.
- makestuff 3y ago
  What are the two companies that control the market?
- sneak 3y ago
  This makes no sense. There are too many companies and too many boards that could just hire any old MBA off the street for non-CEO-cartel prices and get the job done. There is no constrained supply of people willing to be the Mozilla CEO for, say, $2M/year.
  - sackfield 3y ago
    They won’t for optics reasons, it looks incredibly foolish to shareholders to pluck any random MBA and call them a CEO. You have financial due diligence to uphold and this protects you, it shows you are conforming to industry practices.
    - philistine 3y ago
      Just name a damn engineer inside the company! This is so frustrating.
      - carlosjobim 3y ago
        It is a form of "corruption signalling", compared to "virtue signalling". By blatantly hiring a corrupt or incompetent CEO, the board members are advertising to the world (of finance) that they are corrupt and ready to play ball. This way they might be able to get some nice gigs for themselves.
- wkat4242 3y ago
  Also when you buy a CEO you buy their old boys network with it. This is a big part of the high salaries and why it's such an in-crowd.
  - account42 3y ago
    Yet another reason why a non-profit and related corporations shouldn't have such a CEO: The network isn't unidirectional.
- FredPret 3y ago
  How can CEO pay increase “beyond market rates”? They get paid what they get paid and that is by definition market rates. The supply constraint is not due to recruitment companies somehow cornering the CEO market - the very idea is absurd. It’s because large companies need someone with incredibly deep and broad experience to do a job that has a 50/50 chance of going well, a 100% chance of being blamed when things go wrong, a 1% of getting due credit when it’s due, and a 100% chance of copping flak from legions of armchair critics like you.
acover 3y ago
A good CEO can earn you way more than they cost. Why do Realtors earn 2.5% of a house they sell? Because sellers are nervous it'll cost them more not to pay.
- richbell 3y ago
  > Why do Realtors earn 2.5% of a house they sell? Because sellers are nervous it'll cost them more not to pay. That's debatable. Where I live realtors are seen as slimy as used car salesmen. It's an open secret that realtors will steer their clients away from low commission or independently listed properties.
- rileymat2 3y ago
  Realtors is a bad example. https://www.forbes.com/advisor/legal/inflated-real-estate-commissions-damages/ https://www.forbes.com/advisor/legal/inflated-real-estate-co...
- mr_toad 3y ago
  There’s a huge downside to hiring a bad CEO (or a bad realtor, or even a bad plumber), so people want the best. Also, shareholders should be free to pay whatever they want, the same as homeowners. If you tried to tell me what rate I should be paying my plumber based on some moral reasoning I’d nod and ignore you, and as a shareholder I likely don’t want your opinion either.
dekhn 3y ago
Although I generally think most CEOs are overpaid, remember: they are legally accountable for the behavior of the organization. For example, David Drummond, who was Chief Legal Officer at Google (until it turned out he was impregnating people who reported to him) was convicted in a lawsuit in Italy, sentenced to prison, and there was a warrant for his arrest if he entered. This was over a video on a part of google that David had no real oversight on, where Google removed a video within only minutes of the issue being reported. I figure legal responsibility is about $1-2M in pay right there. The CEO also plays a critical role (with the CFO) in finalizing the earnings reports, with severe penalties for mistakes. They make strategic decisions that many employees aren't even aware of, that can have $billion+ repercussions for the company. Taken all together, it's not completely surprising that a CEO of a trillion dollar company makes $10M/year (or receives stock of that value). No, it's not truly meritocratic. I keep coming back to a lesson I was taught as a kid: life's not fair, but you can use your brain to make it a little less unfair.
- lancesells 3y ago
  How many other examples do you have? I've yet to see anyone or anything even close to legally accountable for their behavior. Corporations get caught doing things all the time, and the most I can see is a fine that is typically much smaller than the laws they broke. There's no reason for the compensation between executives and workers to be so great. It's rigged and you can see it right here in this article.
- themaninthedark 3y ago
  That is a risk, just like you are at risk of being arrested if circumvent emissions standards... Oh right, only the engineers were charged in that one. Also luckily for David, it was a 6 month suspended sentence. Meaning that he would have never had to serve any time that was overturned on appeal.
- johnnyanmac 3y ago
  >Taken all together, it's not completely surprising that a CEO of a trillion dollar company makes $10M/year (or receives stock of that value). I mean, sure. a trillion dollar company, 10m dollar salary, that's not even 1 hundredth of a percent of the company. Apparently the Mozilla foundation is around 2 billion in revenue a year. But how is that worth 70% of the above salary (I won't count stocks, it makes sense that if a company makes more money, shareholders make more money)? $we're already well beyond retirement levels of funding in a few years and they double it in 2 years.
imgabe 3y ago
More responsibility. CEOs will be responsible for decisions that could make or break the company. Regular employees generally don't have to worry that something they do might cause the entire company to go out of business and lose everyone's jobs. If the company screws up and causes a scandal of some sort, the rank and file employees are not going to be called to testify before Congress about what went wrong and have the entire media shitting on them for weeks afterwards. The board of directors is willing to pay more for someone who will first, hopefully avoid such screw-ups and second, be able to deal with them if they happen.
- wkat4242 3y ago
  But these board members and CEOs rarely get to face real consequences. At worst a golden handshake that sets them up for their retirement.
  - imgabe 3y ago
    Having the leverage to negotiate high compensation means you also have the leverage to negotiate limited downside. If they were the kind of person who wasn't savvy enough to negotiate well for themselves, would you want them negotiating on behalf of the company?
    - wkat4242 3y ago
      There's a difference between negotiating well and being extremely greedy. The latter is not something you'd want at a company with a respectable image.
      - imgabe 3y ago
        Nobody cares about being "extremely greedy" if the company succeeds. If the "extremely greedy" CEO negotiates hard on the company's behalf and gets price concessions from vendors and drives high profits, nobody is going to be lamenting about how it's not "respectable" when they're cashing their fat bonus checks. On the other hand if the CEO leaves money on the table and doesn't negotiate hard because he's afraid randos on the Internet will call him "greedy" and subsequently profits fall and the company has to lay off thousands of people, nobody is going to pat him on the back and commend him on being "not greedy" and "respectable".
zetazzed 3y ago
If your company makes $1bln per year now and pays a CEO $1 mln, and then someone comes along who has much better ideas, better work ethic, and more experience and you (the board) are convinced they can add 5% of revenue as pure profit to your company per year. They will add $50 mln in value per year. If that person asks $5 mln as compensation would it be responsible to say no? Or to take a more concrete example, if Elon Musk decided to quit Tesla in a huff and focus entirely on X and stop dealing with the annoyance of public markets, the stock's would probably lose $75 bln in value overnight. If your legal goal is to maximize the company's value and it takes $500 mln pay per year to keep that from loss happening, it seems like it's probably a good deal to just pay the $500. As another example, Steve Jobs received hundreds of millions in stock options, and that was probably an excellent deal for Apple, though they probably could've hired someone cheaper. I agree there are many cases where a more expensive CEO is actually worse. But I think it is very very easy to imagine cases where it makes a ton of sense to pay a large amount for an expensive CEO if they are the right person for the job and will add 10x more value than their pay.
- ikt 3y ago
  > if Elon Musk This isn't a fair comparison to most companies as Musk has made Tesla largely about him, can you think of many other companies where if the CEO left a 75 billion dollar stock drop would happen?
bad_username 3y ago
> average worker actually responsible for creating value CEOs actually are generally responsible for creating a lot of value, but most importantly, enabling a lot of value to be created by many others. When there is a causal link from you to a lot of created value, you tend to be paid proportionally well. To believe that value is only actually created by average workers, and not the organizers of this work such as leaders or business owners, is quite short sighted. There are strong ideologies pushing this belief which I hope is not influencing your thought process. Yes, there are bad CEOs out there, but they are not generally all bad.
- johnnyanmac 3y ago
  >Yes, there are bad CEOs out there, but they are not generally all bad. most of the Fortune 500 don't seem to have much good to talk about. Let alone what justifies 8 figure compensation. I guess we'll never truly know, but it does make one wonder how much change it'd be for those to be run by CEOs for a tenth of the compensation (which mind you, is still 7 figures).
chillfox 3y ago
It seems perfectly meritocratic to me. I mean it’s consistent with how the word “meritocratic” is always used. I have never seen a system that was actually based on skill or effort be described as meritocratic. Likewise I have never seen a system described as meritocratic that was actually based on skill or effort. The way meritocratic is usually used is to describe systems that could appear to be based on skill or effort at the surface, but is not actually if you look just a little deeper.
smugma 3y ago
Here’s a different way to think about it. Each level up makes 25-50% above the level below it. Maybe at director or VP the jump is a bit bigger. If senior engineers in the valley are making $500K TC, directors might clear $1M and VP’s $2M. Above that it goes bonkers where you’ll see an SVP make $10M and a CEO $20M+. Why do senior engineers make $500K? Well, they may be 2-5X more efficient than a junior, or you can look at how much value they are bringing in to the company.
edpichler 3y ago
Basically, more responsibility = more money.
ta_9390 3y ago
Supply:Demand ratio, like anything else.
npteljes 3y ago
CEO pay is similar to other payments, where everyone is trying to claw themselves as much as they can, to certain personal limits. Powerful roles attract people who want power, and so, the higher up you go in a hierarchy, the more "dark"[0] traits you find, which equates to lessening personal limits to power / money gain. If you think of the ability, willingness and perseverance of one to further one's personal power as merit, then this is a meritocracy after all. With regards to accepting that, culture plays a big role. Governments effectively groom people into accepting the status quo, some stronger than others. They build on features of the human psyche that otherwise support this too, for example, in many cultures it's taboo to question elders, and also, many cultures observe different classes of people, where the different classes wield different levels of power by default. If you're interested in the psychology of this, I would suggest to look into how societies are organized over the recorded history of humankind. The charisma and image of the well-off leaders also plays a part in making people accept, and support their advantage. This is also something that people are much cleverer about than in the past - the art that is currently called public relations. The idea here is that whatever people perceive, must make sense in their mind, somehow. If it makes sense, then it's accepted much easier, and if it doesn't, it's bothersome and makes people think about a story where it makes sense after all. So, one aspect of public relations is and making certain things observable, others obscured, and crafting a narrative about the observable things. This game is "history written by victors", but a bit backwards - whoever sells the most compelling narrative, comes out as the victor. At the end of the day, the question is "what are you going to do about it?". Certain things just are because we're not doing anything about it. Doing about it is a ton of effort, might not be possible, might not worth it at all because the effort outweighs the results, might not worth it because the side effects are greater than the potential gains. Or maybe people care about other things. And because all of these concerns exist in all humans, those in power can exploit these too, in order to keep or further their power. [0] https://en.wikipedia.org/wiki/Dark_triad https://en.wikipedia.org/wiki/Dark_triad https://en.wikipedia.org/wiki/Social_stratification https://en.wikipedia.org/wiki/Social_stratification

sackfield 3y ago

What usually happens here is the board of a company say to themselves "Let's hire a professional CEO", the next answer then is how, you don't see these jobs advertised on LinkedIn, so they get a talent recruitment agency. For C level management positions there are usually 2 options that control the most of the market, these 2 options have rosters of people from well known business schools with experience ready to step in. Because the supply is constrained by these companies the CEO pay increases well beyond market rates, as each CEO will earn X% more than the one before it by faking competitiveness, then the former CEOs will complain (as the Mozilla CEO did here) about relative market rates of other CEOs, even though the market rates are set by the cartel that proposed them in the first place. The board not wanting to rock the boat for the shareholders will generally agree to this extortion for optics, and round and round the merry go round goes.

makestuff 3y ago
What are the two companies that control the market?
sneak 3y ago
This makes no sense. There are too many companies and too many boards that could just hire any old MBA off the street for non-CEO-cartel prices and get the job done. There is no constrained supply of people willing to be the Mozilla CEO for, say, $2M/year.
- sackfield 3y ago
  They won’t for optics reasons, it looks incredibly foolish to shareholders to pluck any random MBA and call them a CEO. You have financial due diligence to uphold and this protects you, it shows you are conforming to industry practices.
  - philistine 3y ago
    Just name a damn engineer inside the company! This is so frustrating.
    - carlosjobim 3y ago
      It is a form of "corruption signalling", compared to "virtue signalling". By blatantly hiring a corrupt or incompetent CEO, the board members are advertising to the world (of finance) that they are corrupt and ready to play ball. This way they might be able to get some nice gigs for themselves.
wkat4242 3y ago
Also when you buy a CEO you buy their old boys network with it. This is a big part of the high salaries and why it's such an in-crowd.
- account42 3y ago
  Yet another reason why a non-profit and related corporations shouldn't have such a CEO: The network isn't unidirectional.
FredPret 3y ago
How can CEO pay increase “beyond market rates”? They get paid what they get paid and that is by definition market rates. The supply constraint is not due to recruitment companies somehow cornering the CEO market - the very idea is absurd. It’s because large companies need someone with incredibly deep and broad experience to do a job that has a 50/50 chance of going well, a 100% chance of being blamed when things go wrong, a 1% of getting due credit when it’s due, and a 100% chance of copping flak from legions of armchair critics like you.

acover 3y ago

A good CEO can earn you way more than they cost. Why do Realtors earn 2.5% of a house they sell? Because sellers are nervous it'll cost them more not to pay.

richbell 3y ago
> Why do Realtors earn 2.5% of a house they sell? Because sellers are nervous it'll cost them more not to pay. That's debatable. Where I live realtors are seen as slimy as used car salesmen. It's an open secret that realtors will steer their clients away from low commission or independently listed properties.
rileymat2 3y ago
Realtors is a bad example. https://www.forbes.com/advisor/legal/inflated-real-estate-commissions-damages/ https://www.forbes.com/advisor/legal/inflated-real-estate-co...
mr_toad 3y ago
There’s a huge downside to hiring a bad CEO (or a bad realtor, or even a bad plumber), so people want the best. Also, shareholders should be free to pay whatever they want, the same as homeowners. If you tried to tell me what rate I should be paying my plumber based on some moral reasoning I’d nod and ignore you, and as a shareholder I likely don’t want your opinion either.

dekhn 3y ago

Although I generally think most CEOs are overpaid, remember: they are legally accountable for the behavior of the organization. For example, David Drummond, who was Chief Legal Officer at Google (until it turned out he was impregnating people who reported to him) was convicted in a lawsuit in Italy, sentenced to prison, and there was a warrant for his arrest if he entered. This was over a video on a part of google that David had no real oversight on, where Google removed a video within only minutes of the issue being reported. I figure legal responsibility is about $1-2M in pay right there. The CEO also plays a critical role (with the CFO) in finalizing the earnings reports, with severe penalties for mistakes. They make strategic decisions that many employees aren't even aware of, that can have $billion+ repercussions for the company. Taken all together, it's not completely surprising that a CEO of a trillion dollar company makes $10M/year (or receives stock of that value). No, it's not truly meritocratic. I keep coming back to a lesson I was taught as a kid: life's not fair, but you can use your brain to make it a little less unfair.

lancesells 3y ago
How many other examples do you have? I've yet to see anyone or anything even close to legally accountable for their behavior. Corporations get caught doing things all the time, and the most I can see is a fine that is typically much smaller than the laws they broke. There's no reason for the compensation between executives and workers to be so great. It's rigged and you can see it right here in this article.
themaninthedark 3y ago
That is a risk, just like you are at risk of being arrested if circumvent emissions standards... Oh right, only the engineers were charged in that one. Also luckily for David, it was a 6 month suspended sentence. Meaning that he would have never had to serve any time that was overturned on appeal.
johnnyanmac 3y ago
>Taken all together, it's not completely surprising that a CEO of a trillion dollar company makes $10M/year (or receives stock of that value). I mean, sure. a trillion dollar company, 10m dollar salary, that's not even 1 hundredth of a percent of the company. Apparently the Mozilla foundation is around 2 billion in revenue a year. But how is that worth 70% of the above salary (I won't count stocks, it makes sense that if a company makes more money, shareholders make more money)? $we're already well beyond retirement levels of funding in a few years and they double it in 2 years.

imgabe 3y ago

More responsibility. CEOs will be responsible for decisions that could make or break the company. Regular employees generally don't have to worry that something they do might cause the entire company to go out of business and lose everyone's jobs. If the company screws up and causes a scandal of some sort, the rank and file employees are not going to be called to testify before Congress about what went wrong and have the entire media shitting on them for weeks afterwards. The board of directors is willing to pay more for someone who will first, hopefully avoid such screw-ups and second, be able to deal with them if they happen.

wkat4242 3y ago
But these board members and CEOs rarely get to face real consequences. At worst a golden handshake that sets them up for their retirement.
- imgabe 3y ago
  Having the leverage to negotiate high compensation means you also have the leverage to negotiate limited downside. If they were the kind of person who wasn't savvy enough to negotiate well for themselves, would you want them negotiating on behalf of the company?
  - wkat4242 3y ago
    There's a difference between negotiating well and being extremely greedy. The latter is not something you'd want at a company with a respectable image.
    - imgabe 3y ago
      Nobody cares about being "extremely greedy" if the company succeeds. If the "extremely greedy" CEO negotiates hard on the company's behalf and gets price concessions from vendors and drives high profits, nobody is going to be lamenting about how it's not "respectable" when they're cashing their fat bonus checks. On the other hand if the CEO leaves money on the table and doesn't negotiate hard because he's afraid randos on the Internet will call him "greedy" and subsequently profits fall and the company has to lay off thousands of people, nobody is going to pat him on the back and commend him on being "not greedy" and "respectable".

zetazzed 3y ago

If your company makes $1bln per year now and pays a CEO $1 mln, and then someone comes along who has much better ideas, better work ethic, and more experience and you (the board) are convinced they can add 5% of revenue as pure profit to your company per year. They will add $50 mln in value per year. If that person asks $5 mln as compensation would it be responsible to say no? Or to take a more concrete example, if Elon Musk decided to quit Tesla in a huff and focus entirely on X and stop dealing with the annoyance of public markets, the stock's would probably lose $75 bln in value overnight. If your legal goal is to maximize the company's value and it takes $500 mln pay per year to keep that from loss happening, it seems like it's probably a good deal to just pay the $500. As another example, Steve Jobs received hundreds of millions in stock options, and that was probably an excellent deal for Apple, though they probably could've hired someone cheaper. I agree there are many cases where a more expensive CEO is actually worse. But I think it is very very easy to imagine cases where it makes a ton of sense to pay a large amount for an expensive CEO if they are the right person for the job and will add 10x more value than their pay.

ikt 3y ago
> if Elon Musk This isn't a fair comparison to most companies as Musk has made Tesla largely about him, can you think of many other companies where if the CEO left a 75 billion dollar stock drop would happen?

bad_username 3y ago

> average worker actually responsible for creating value CEOs actually are generally responsible for creating a lot of value, but most importantly, enabling a lot of value to be created by many others. When there is a causal link from you to a lot of created value, you tend to be paid proportionally well. To believe that value is only actually created by average workers, and not the organizers of this work such as leaders or business owners, is quite short sighted. There are strong ideologies pushing this belief which I hope is not influencing your thought process. Yes, there are bad CEOs out there, but they are not generally all bad.

johnnyanmac 3y ago
>Yes, there are bad CEOs out there, but they are not generally all bad. most of the Fortune 500 don't seem to have much good to talk about. Let alone what justifies 8 figure compensation. I guess we'll never truly know, but it does make one wonder how much change it'd be for those to be run by CEOs for a tenth of the compensation (which mind you, is still 7 figures).

chillfox 3y ago

It seems perfectly meritocratic to me. I mean it’s consistent with how the word “meritocratic” is always used. I have never seen a system that was actually based on skill or effort be described as meritocratic. Likewise I have never seen a system described as meritocratic that was actually based on skill or effort. The way meritocratic is usually used is to describe systems that could appear to be based on skill or effort at the surface, but is not actually if you look just a little deeper.

smugma 3y ago

Here’s a different way to think about it. Each level up makes 25-50% above the level below it. Maybe at director or VP the jump is a bit bigger. If senior engineers in the valley are making $500K TC, directors might clear $1M and VP’s $2M. Above that it goes bonkers where you’ll see an SVP make $10M and a CEO $20M+. Why do senior engineers make $500K? Well, they may be 2-5X more efficient than a junior, or you can look at how much value they are bringing in to the company.

edpichler 3y ago

Basically, more responsibility = more money.

ta_9390 3y ago

Supply:Demand ratio, like anything else.

npteljes 3y ago

CEO pay is similar to other payments, where everyone is trying to claw themselves as much as they can, to certain personal limits. Powerful roles attract people who want power, and so, the higher up you go in a hierarchy, the more "dark"[0] traits you find, which equates to lessening personal limits to power / money gain. If you think of the ability, willingness and perseverance of one to further one's personal power as merit, then this is a meritocracy after all. With regards to accepting that, culture plays a big role. Governments effectively groom people into accepting the status quo, some stronger than others. They build on features of the human psyche that otherwise support this too, for example, in many cultures it's taboo to question elders, and also, many cultures observe different classes of people, where the different classes wield different levels of power by default. If you're interested in the psychology of this, I would suggest to look into how societies are organized over the recorded history of humankind. The charisma and image of the well-off leaders also plays a part in making people accept, and support their advantage. This is also something that people are much cleverer about than in the past - the art that is currently called public relations. The idea here is that whatever people perceive, must make sense in their mind, somehow. If it makes sense, then it's accepted much easier, and if it doesn't, it's bothersome and makes people think about a story where it makes sense after all. So, one aspect of public relations is and making certain things observable, others obscured, and crafting a narrative about the observable things. This game is "history written by victors", but a bit backwards - whoever sells the most compelling narrative, comes out as the victor. At the end of the day, the question is "what are you going to do about it?". Certain things just are because we're not doing anything about it. Doing about it is a ton of effort, might not be possible, might not worth it at all because the effort outweighs the results, might not worth it because the side effects are greater than the potential gains. Or maybe people care about other things. And because all of these concerns exist in all humans, those in power can exploit these too, in order to keep or further their power. [0] https://en.wikipedia.org/wiki/Dark_triad https://en.wikipedia.org/wiki/Dark_triad https://en.wikipedia.org/wiki/Social_stratification https://en.wikipedia.org/wiki/Social_stratification