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But that's a "be careful what you wish for" observation. I mean, obviously it prompts the question of why executive compensation grew so fast. Well, executive
by ajross 2y ago
But that's a "be careful what you wish for" observation. I mean, obviously it prompts the question of why executive compensation grew so fast.
Well, executives are paid a ton because they need to compete in an environment where other executives of successful companies are already filthy rich. And why is that? Well, it's actually not because of compensation policy at all.
Those other executives are rich because they were founders who hit an exit. That is, it's all HN's fault (and the fault of the VC-based startup money engine more generally).
We created an environment where to staff a successful C suite you need to hire away senior people from FAANGs. And you can't do that unless you pay them crazy numbers. And that means the rest of your executive staff, and your board, need to see the same numbers. And so on, across the rest of the economy.
You can't have an economy producing huge numbers in the stock market without handing those dollars out, in proportion, to the senior staff, basically. The same analysis does not hold to the regular employees, who don't compete against people getting that exit money.
- malvim 2y agoYou’re saying when executives compete, their average salary goes higher, but when workers like us compete, our average salary gets smaller?
- ajross 2y agoI... said nothing like that at all? Not sure how you interpret that from what I wrote. (Also btw: average salaries for works are NOT GETTING SMALLER and I remain absolutely dumbfounded that people continue to believe this lie). Rephrasing: I said salaries in competition trend to market price points, and market price points for executives are set by externalities like "IPO windfalls" that don't exist for workers.
- MarkusQ 2y agoWhen companies compete to hire top executives, the cost of hiring those executives goes up. Just like with athletes or musicians.
- s1artibartfast 2y agoI think that is a reasonable conclusion. We don't need state imposed minimum wage and benefit laws for CEOs. Wages aren't set but effort or value creation, but by marginal benefits of salary
- ajross 2y agoI'm not sure exactly what principle you're trying to cite here, but as I understand the words that's wrong. "Value creation" is the only point to paying anyone to do something in the first place. You pay people to do work from which you hope to get value. There are other reasons that might inspire, elicit or compel one person's labor at someone else's direction; but if you accept the idea of "salary" as a concept, then it exists to create value, by definition.
- s1artibartfast 2y agoyes, you pay someone because you derive value from their work. How much you pay them is a question of marginal cost/benefit, not total value. If I make a fixed $100 from some labor, that number is an upper bound for how much I would ever pay, but doesnt determine how much I actually do pay. That is set by supply and demand for someone that can do the job. Maybe it is $1, maybe it is $99. For jobs with variable productivity, pay is set by marginal benefit. If paying $1 more nets $10 more profit, you pay more. Repeat until you dont get more profit from raising wages. Wages are set by the derivative of profit, not profit itself.
- ajross 2y ago> a question of marginal cost/benefit, not total value. Uh... yes it is? Are "benefit" and "value" not synonyms here? I think you're confusing "value" with "profit" maybe? They may not be equal, but the denominator in "cost/benefit" is exactly what I'm talking about.
- s1artibartfast 2y agoYes, value and benefit are synonymous, but in reference to different objects/choices. There is the financial benefit that doing the work provides, and the financial benefit of paying more. The pre-cost benefit of having any worker might be $100. If you can get a worker for $10, the marginal benefit or paying $20 is negative $10.
- grajaganDev 2y agoThe VC-based startup money engine was much smaller in 1971. There were very few executives rich from an exit.
- ajross 2y agoSo was the effect. The change in 1971 was an inflection point in the first derivative. In point of fact, ~1971 seems to be almost exactly when this started. For reference, the term "Silicon Valley" was first used in print in 1971!
- lordnacho 2y agoWhy doesn't this logic work for all the staff? You need staff for your VC-backed startup as well, don't you? This explanation doesn't seem to explain why the CEO/staff comp ratio goes up. It just seems to say that comp should go up. If CEOs and staff both got their pay doubled by moving to one of these startups, the ratio would just stay the same.
- ajross 2y agoBecause good candidates for normal staff positions are not independently wealthy. Good candidates for executive positions tend strongly to be, having proven their value by bringing up some other startup. Hiring away someone with a net worth of $100M with a salary that is merely 10x or whatever of your employee compensation doesn't work. You need to cut a bigger check.
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