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With plenty of respect to the conclusion (stock options to pay CEOs are wildly exploited) I'm not sure how that's supposed to be a failure of the idea that "com

With plenty of respect to the conclusion (stock options to pay CEOs are wildly exploited) I'm not sure how that's supposed to be a failure of the idea that "companies exist merely to generate economic returns to their owners". It sounds more like a failure of a common mechanism used to seek that goal.

Zigurd 12y ago
"Eyes on the scoreboard, not on the ball." It's not hard to see where problems could come from. Quarter-driven management, etc.
Retric 12y ago
It's a critique of a movement not an idea. I would argue executives should receive stock with long vesting schedules (as in 30 years) not options. However, options are nominally cheap up front so they tend to look more appealing for boards.
- pflats 12y ago
  While I agree with your sentiment, 30 years seems unreasonably long to me. At that point, you might as well just require the stock be put in a trust for the CEO's heirs.
  - Arubis 12y ago
    Doing exactly that would select specifically for people that care enough about future generations and those to follow to make personal sacrifices: "you won't end up filthy rich, but your children can escape the bonds of debt." Obviously not universally appealing, but I would go out of my way to work with someone like that, and would attach a level of personal trust to an organization under their guidance. I wonder what situations this would apply well to? It doesn't greatly bother me that CEOs of oil companies are profit-driven, but the concept of rewarding someone's work by enriching the people that they love, rather than just creating short-term incentives, would fit especially well with nonprofits and NGOs, which oftentimes seem like their primary mission is to justify their continued existence.
    - gohrt 12y ago
      Why should the offspring of a person get the person's salary?
    - tormeh 12y ago
      10 or even 5 years would be long enough. That's far longer than most CEO's stay in the job.
      - wpietri 12y ago
        That's not the correct yardstick. CEOs are supposed to be making strategic decisions with decades of impact. If they are compensated based on short-term results, then they will have a strong incentive to make short-term decisions.
        tormeh 12y ago
        I think this is an unsolvable problem. I don't understand how anyone could accept such a delay in payment. Remember most companies aren't alive for 30 years. IBM, GE, etc. are exceptions to the rule. Maybe the best thing to do is to abandon performance-based compensation entirely, because it can't be done over long timescales and over short ones it is an abomination.
        wpietri 12y ago
        I think you have it backwards. Perhaps the reason most companies no longer last is that the people running them have no financial interest in their long-term survival. Note that plenty of founder CEOs are happy to accept near-infinite delays in payment. 90% of Jeff Bezos's wealth is still in Amazon stock despite being there 20 years. And Amazon has been kicking the asses of its competitors for decades precisely because it has been willing to make very long-term investments.
        pflats 12y ago
        >90% of Jeff Bezos's wealth is still in Amazon stock despite being there 20 years. With Bezos, we are talking about amounts of money so large that I (and I assume you) can't truly conceive of them. If 90% of his net worth is Amazon, Jeff Bezos has ~$3 billion dollars invested in companies other than his own. He's plenty diversified and if that 3 billion is properly managed, he'll never want for anything, ever. Even if Amazon stock falls to 1/10th of its value, Bezos's life won't appreciably change, he'll just have slightly less leeway when building his multi-million-dollar cave clocks.
  - Retric 12y ago
    They still receive some stock on year 1 they just also get the same amount of stock on year 10 and year 30. Anyway the whole point is to get a CEO to optimize for the long term if there not willing to get deferred compensation you probably don't want them as your CEO. Sure, there are tax implications but company's can generally just pay those taxes. The point is getting upper managment to align with invested plenty of investors care about there returns over longer periods than 30 years.
- wpietri 12y ago
  I think that would be an excellent approach. CEOs get the big bucks because, supposedly, they are making wise strategic decisions that have an impact for decades. They are, in theory, building to last. I'm generally suspicious of incentive pay, but we're going to use it the time scales should match the results we are trying to incentivize. (Of course, I think the pay system we have exists because CEOs get paid the big bucks for entirely different reasons. If a system consistently produces a given result, then whatever the nominal purpose, the result generally reflects the actual purpose.)
gerbal 12y ago
The nature of ownership has shifted from a long term shared investment in an enterprise, to a short-term investment expecting immediate returns in the next quarter.
bobcostas55 12y ago
Agreed, it's a very shallow take on the matter. It treats "shareholder value" and "short-term expectations tunnel vision" as synonymous, but I don't think that is the case. Even if it were, it's still not a good argument: even if shareholder value necessarily imposes (opportunity) costs in terms of profitable projects not taken (what's the difference between the lost returns and the second-best choice, anyway? probably negligible), you have to compare this to the costs of alternatives. Countries with "stakeholder" involvement in the governance system tend to have marginal q < 1, i.e. they undertake negative NPV projects, destroying capital.
- glesica 12y ago
  But I think you're making the same argument. A CEO is a "stakeholder". When the CEO makes decisions with an eye on the very short-term (to hit share price or EPS targets) he or she potentially destroys capital. It might even be the case that shareholders today aren't really any better than other "stakeholders" in terms of alignment of incentives. If I'm just arbitraging a stock, do I really care how the company actually performs in real life? Probably not. I care about the popular perception of the company in the market at the point at which I want to sell (or buy, I suppose, depending whether I'm long or short, but whatever, same difference).
  - bobcostas55 12y ago
    >When the CEO makes decisions with an eye on the very short-term (to hit share price or EPS targets) he or she potentially destroys capital. The crucial difference is that, according to the article at least, the short-termism leads to them not taking +NPV projects, instead returning money to shareholders. This money can be redeployed productively, so even if it's not earning the NPV of that theoretical project, it's earning something very close to it. The opportunity cost is very small. Stakeholders undertaking -NPV projects is a whole other ballpark. Just consider the growth implications when this happens economy-wide.
    - glesica 12y ago
      It's true that they are different, though I disagree that the next-best option is always going to be "vary close"). However, in this case the "shareholder value" problem is systemic, meaning that there really isn't anywhere else for shareholders to put their money. This potentially helps explain some of the asset bubbles we've seen, as well as the startup bubble (if one exists). Regardless of how the analysis falls out for the shareholder, then, the situation is almost certainly sub-optimal for the economy as a whole.
NPMaxwell 12y ago
I gather that the idea is that stock prices a manipulated to follow a sawtooth pattern -- plummeting with the big bath of the new CEO and rising during the CEO's tenure. I haven't seen the evidence that this is so, but it would explain why CEO compensation exceeds returns on investment.

Zigurd 12y ago

"Eyes on the scoreboard, not on the ball." It's not hard to see where problems could come from. Quarter-driven management, etc.

Retric 12y ago

It's a critique of a movement not an idea. I would argue executives should receive stock with long vesting schedules (as in 30 years) not options. However, options are nominally cheap up front so they tend to look more appealing for boards.

pflats 12y ago
While I agree with your sentiment, 30 years seems unreasonably long to me. At that point, you might as well just require the stock be put in a trust for the CEO's heirs.
- Arubis 12y ago
  Doing exactly that would select specifically for people that care enough about future generations and those to follow to make personal sacrifices: "you won't end up filthy rich, but your children can escape the bonds of debt." Obviously not universally appealing, but I would go out of my way to work with someone like that, and would attach a level of personal trust to an organization under their guidance. I wonder what situations this would apply well to? It doesn't greatly bother me that CEOs of oil companies are profit-driven, but the concept of rewarding someone's work by enriching the people that they love, rather than just creating short-term incentives, would fit especially well with nonprofits and NGOs, which oftentimes seem like their primary mission is to justify their continued existence.
  - gohrt 12y ago
    Why should the offspring of a person get the person's salary?
  - tormeh 12y ago
    10 or even 5 years would be long enough. That's far longer than most CEO's stay in the job.
    - wpietri 12y ago
      That's not the correct yardstick. CEOs are supposed to be making strategic decisions with decades of impact. If they are compensated based on short-term results, then they will have a strong incentive to make short-term decisions.
      - tormeh 12y ago
        I think this is an unsolvable problem. I don't understand how anyone could accept such a delay in payment. Remember most companies aren't alive for 30 years. IBM, GE, etc. are exceptions to the rule. Maybe the best thing to do is to abandon performance-based compensation entirely, because it can't be done over long timescales and over short ones it is an abomination.
        wpietri 12y ago
        I think you have it backwards. Perhaps the reason most companies no longer last is that the people running them have no financial interest in their long-term survival. Note that plenty of founder CEOs are happy to accept near-infinite delays in payment. 90% of Jeff Bezos's wealth is still in Amazon stock despite being there 20 years. And Amazon has been kicking the asses of its competitors for decades precisely because it has been willing to make very long-term investments.
        pflats 12y ago
        >90% of Jeff Bezos's wealth is still in Amazon stock despite being there 20 years. With Bezos, we are talking about amounts of money so large that I (and I assume you) can't truly conceive of them. If 90% of his net worth is Amazon, Jeff Bezos has ~$3 billion dollars invested in companies other than his own. He's plenty diversified and if that 3 billion is properly managed, he'll never want for anything, ever. Even if Amazon stock falls to 1/10th of its value, Bezos's life won't appreciably change, he'll just have slightly less leeway when building his multi-million-dollar cave clocks.
- Retric 12y ago
  They still receive some stock on year 1 they just also get the same amount of stock on year 10 and year 30. Anyway the whole point is to get a CEO to optimize for the long term if there not willing to get deferred compensation you probably don't want them as your CEO. Sure, there are tax implications but company's can generally just pay those taxes. The point is getting upper managment to align with invested plenty of investors care about there returns over longer periods than 30 years.
wpietri 12y ago
I think that would be an excellent approach. CEOs get the big bucks because, supposedly, they are making wise strategic decisions that have an impact for decades. They are, in theory, building to last. I'm generally suspicious of incentive pay, but we're going to use it the time scales should match the results we are trying to incentivize. (Of course, I think the pay system we have exists because CEOs get paid the big bucks for entirely different reasons. If a system consistently produces a given result, then whatever the nominal purpose, the result generally reflects the actual purpose.)

gerbal 12y ago

The nature of ownership has shifted from a long term shared investment in an enterprise, to a short-term investment expecting immediate returns in the next quarter.

bobcostas55 12y ago

Agreed, it's a very shallow take on the matter. It treats "shareholder value" and "short-term expectations tunnel vision" as synonymous, but I don't think that is the case. Even if it were, it's still not a good argument: even if shareholder value necessarily imposes (opportunity) costs in terms of profitable projects not taken (what's the difference between the lost returns and the second-best choice, anyway? probably negligible), you have to compare this to the costs of alternatives. Countries with "stakeholder" involvement in the governance system tend to have marginal q < 1, i.e. they undertake negative NPV projects, destroying capital.

glesica 12y ago
But I think you're making the same argument. A CEO is a "stakeholder". When the CEO makes decisions with an eye on the very short-term (to hit share price or EPS targets) he or she potentially destroys capital. It might even be the case that shareholders today aren't really any better than other "stakeholders" in terms of alignment of incentives. If I'm just arbitraging a stock, do I really care how the company actually performs in real life? Probably not. I care about the popular perception of the company in the market at the point at which I want to sell (or buy, I suppose, depending whether I'm long or short, but whatever, same difference).
- bobcostas55 12y ago
  >When the CEO makes decisions with an eye on the very short-term (to hit share price or EPS targets) he or she potentially destroys capital. The crucial difference is that, according to the article at least, the short-termism leads to them not taking +NPV projects, instead returning money to shareholders. This money can be redeployed productively, so even if it's not earning the NPV of that theoretical project, it's earning something very close to it. The opportunity cost is very small. Stakeholders undertaking -NPV projects is a whole other ballpark. Just consider the growth implications when this happens economy-wide.
  - glesica 12y ago
    It's true that they are different, though I disagree that the next-best option is always going to be "vary close"). However, in this case the "shareholder value" problem is systemic, meaning that there really isn't anywhere else for shareholders to put their money. This potentially helps explain some of the asset bubbles we've seen, as well as the startup bubble (if one exists). Regardless of how the analysis falls out for the shareholder, then, the situation is almost certainly sub-optimal for the economy as a whole.

NPMaxwell 12y ago

I gather that the idea is that stock prices a manipulated to follow a sawtooth pattern -- plummeting with the big bath of the new CEO and rising during the CEO's tenure. I haven't seen the evidence that this is so, but it would explain why CEO compensation exceeds returns on investment.