4 ms·

"What it almost perfectly aligns to is the S&P 500 chart." You've displayed correlation and insisted causation. Of course, Ezra seems to have done so as well,

by criley2 11y ago

"What it almost perfectly aligns to is the S&P 500 chart." You've displayed correlation and insisted causation. Of course, Ezra seems to have done so as well, but your correlation isn't any more impressive than his.

adventured 11y ago
The fact that it so closely aligns, in both spikes and drops, over a 50 year period of time, more than proves the point. I'm insisting that such an extreme coincidence is impossible.
- Phlarp 11y ago
  It seems to decouple quite noticeably around 2008.
  - notahacker 11y ago
    The decoupling in 2008 is plausibly explained by increased pressures for pay restraint following the financial crisis.
    - Phlarp 11y ago
      I agree, but now we're back to confusing correlation with causation.
  - breischl 11y ago
    Note that the compensation is partially (largely?) due to "options exercised." Depending on how that data is tabulated, it's possible that many options have not yet been exercised, and thus aren't included in that metric. ie, CEOs might be sitting on a bunch of granted-but-not-yet-exercised options. You could get a better idea by looking at the value of options granted and their vest dates, but I don't care enough to dig that deeply.
- criley2 11y ago
  Very often in statistics the common sense answer is completely wrong. That's why we insist that correlation does not equal causation. Your picture proves STRONG CORRELATION but says nothing about causation. It can't say anything about causation, because that information is missing currently without an analysis. Technically speaking (the best kind of speaking) you have demonstrated only that these two things are correlated, but you have not proved that one caused the other. For example, the rise in CEO pay could have caused the stock increases, not the other way around. Or, both could be caused by another even more perfect factor. Without a causation analysis to factor for error, we cannot know, and its simply wrong to assume that one caused the other.
  - tjradcliffe 11y ago
    You're ignoring that he provides a trivial analysis that is easily tested: the claim that CEO compenstation is dominated by stock options or other stock-price-linked things. The high degree of correlation is a priori slightly weird, although it would be interesting to look more deeply into how probable it is that two such time-series would be so strongly correlated. However, the causal account is easily tested: http://web.stanford.edu/group/knowledgebase/cgi-bin/2010/09/17/sensitivity-of-ceo-wealth-to-stock-price-a-new-tool-for-assessing-pay-for-performance/ http://web.stanford.edu/group/knowledgebase/cgi-bin/2010/09/... From the paper: "Based on a sample of 4,000 publicly traded U.S. companies, the average (median) CEO stands to gain roughly $58,000 in wealth for every 1 percent increase in stock price. Among the largest 100 companies, this figure approaches $640,000.6" So the hypothesis the observed correlation was used to generate appears to be plausible given the further evidence that CEO wealth really is tied to stock price, whether directly through options or other means. This is how we actually use statistical analysis, as part of a dialog between reality and propositions, rather than repeating the empty matra "correlation is not causation", which while true is something I too often see deployed to denigrate interesting and potentially fertile observations. Whenever we have the urge to say "correlation is not causation" we should step back and ask, "How can I investigate the question more deeply?" Often more fruitful avenues will present themselves to the inquring mind.
DamnYuppie 11y ago
I agree that it doesn't improve causation but it is more realistic to expect that their increase in pay strongly correlates with the S&P 500 as stock price is the underlying vehicle of their compensation.
- criley2 11y ago
  >stock price is the underlying vehicle of their compensation. Would not company performance be the vehicle, and stock price simply one measure of performance? It's not like stock price and business performance are identical, it's very possible for a company to be over or under valued. Could we not say that company performance causes both stock price AND ceo pay, thereby showing that stock price and ceo pay are NOT in a causative relationship, only correlated because both are caused by actual business performance?
  - notahacker 11y ago
    Stock price is what the market thinks of company performance, not to mention the metric of company performance CEO compensation is usually explicitly linked to. I'm not persuaded of the existence of some more accurate measure of company performance than market cap that CEO compensation committees are aware of but Wall Street isn't.
  - DamnYuppie 11y ago
    Their bulk of their pay comes from the granting of stocks, whose value is driven by their market price. This is was the point I was basing my statement off of.

by criley2 11y ago

adventured 11y ago

The fact that it so closely aligns, in both spikes and drops, over a 50 year period of time, more than proves the point. I'm insisting that such an extreme coincidence is impossible.

Phlarp 11y ago
It seems to decouple quite noticeably around 2008.
- notahacker 11y ago
  The decoupling in 2008 is plausibly explained by increased pressures for pay restraint following the financial crisis.
  - Phlarp 11y ago
    I agree, but now we're back to confusing correlation with causation.
- breischl 11y ago
  Note that the compensation is partially (largely?) due to "options exercised." Depending on how that data is tabulated, it's possible that many options have not yet been exercised, and thus aren't included in that metric. ie, CEOs might be sitting on a bunch of granted-but-not-yet-exercised options. You could get a better idea by looking at the value of options granted and their vest dates, but I don't care enough to dig that deeply.
criley2 11y ago
Very often in statistics the common sense answer is completely wrong. That's why we insist that correlation does not equal causation. Your picture proves STRONG CORRELATION but says nothing about causation. It can't say anything about causation, because that information is missing currently without an analysis. Technically speaking (the best kind of speaking) you have demonstrated only that these two things are correlated, but you have not proved that one caused the other. For example, the rise in CEO pay could have caused the stock increases, not the other way around. Or, both could be caused by another even more perfect factor. Without a causation analysis to factor for error, we cannot know, and its simply wrong to assume that one caused the other.
- tjradcliffe 11y ago
  You're ignoring that he provides a trivial analysis that is easily tested: the claim that CEO compenstation is dominated by stock options or other stock-price-linked things. The high degree of correlation is a priori slightly weird, although it would be interesting to look more deeply into how probable it is that two such time-series would be so strongly correlated. However, the causal account is easily tested: http://web.stanford.edu/group/knowledgebase/cgi-bin/2010/09/17/sensitivity-of-ceo-wealth-to-stock-price-a-new-tool-for-assessing-pay-for-performance/ http://web.stanford.edu/group/knowledgebase/cgi-bin/2010/09/... From the paper: "Based on a sample of 4,000 publicly traded U.S. companies, the average (median) CEO stands to gain roughly $58,000 in wealth for every 1 percent increase in stock price. Among the largest 100 companies, this figure approaches $640,000.6" So the hypothesis the observed correlation was used to generate appears to be plausible given the further evidence that CEO wealth really is tied to stock price, whether directly through options or other means. This is how we actually use statistical analysis, as part of a dialog between reality and propositions, rather than repeating the empty matra "correlation is not causation", which while true is something I too often see deployed to denigrate interesting and potentially fertile observations. Whenever we have the urge to say "correlation is not causation" we should step back and ask, "How can I investigate the question more deeply?" Often more fruitful avenues will present themselves to the inquring mind.

DamnYuppie 11y ago

I agree that it doesn't improve causation but it is more realistic to expect that their increase in pay strongly correlates with the S&P 500 as stock price is the underlying vehicle of their compensation.

criley2 11y ago
>stock price is the underlying vehicle of their compensation. Would not company performance be the vehicle, and stock price simply one measure of performance? It's not like stock price and business performance are identical, it's very possible for a company to be over or under valued. Could we not say that company performance causes both stock price AND ceo pay, thereby showing that stock price and ceo pay are NOT in a causative relationship, only correlated because both are caused by actual business performance?
- notahacker 11y ago
  Stock price is what the market thinks of company performance, not to mention the metric of company performance CEO compensation is usually explicitly linked to. I'm not persuaded of the existence of some more accurate measure of company performance than market cap that CEO compensation committees are aware of but Wall Street isn't.
- DamnYuppie 11y ago
  Their bulk of their pay comes from the granting of stocks, whose value is driven by their market price. This is was the point I was basing my statement off of.