Overpaid relative to what? Your estimation of perceived value? What do you define as value? How would you even begin to empirically establish what you're saying?
Executive compensation is a construct of market consensus, not an absolute based on individual performance. The tangible value contributed by chief executive staff is one component of the compensation package, and what is valuable to the board or shareholders in aggregate may be utterly dissimilar to what you'd consider valuable. Your premise in why an executive should be paid is probably different from the premises used by those who actually choose what the executive will be paid.
The difficulty in finding an appropriate candidate, the risk of their having to publicly "fall on the sword" for the company, their contributed value, their particular skills/culture match, their years of experience, their network of available connections, etc all play a part in determining the compensation. And what's more, you may not measure each of these things with the same respective weighting or definition that the company would.
This is to say that you can arbitrarily say that executives as a class are overpaid, and I can arbitrarily say they're underpaid. You're free to propose a new compensation model, but for better or worse, most boards and shareholders seem fine with the status quo. Given that, it's not very productive to make a blanket statement about them being over or under-compensated if we can't establish that we're all working from the same set of premises.
You'd have about as much rigor in claiming that TSLA is overvalued relative to GM. Sure, you might be right, but 1) why listen to you rather than, say Zacks and 2) what makes your model of compensation more valid, when you have to surmount the burden of not just correctness but market consensus?
I'm honestly baffled every time a free market zealous believer goes around saying "nothing is unfair! the market, by definition, makes everything fair!"
What is it going to take to make statements like "bosses are making too much money compared to their workers" popular again, so that people can actually mobilize and enact legislation to protect their own interests as a class?
I was shooting heroin and reading “The Fountainhead” in the front seat of my privately owned police cruiser when a call came in. I put a quarter in the radio to activate it. It was the chief.
“Bad news, detective. We got a situation.”
“What? Is the mayor trying to ban trans fats again?”
“Worse. Somebody just stole four hundred and forty-seven million dollars’ worth of bitcoins.”
The heroin needle practically fell out of my arm. “What kind of monster would do something like that? Bitcoins are the ultimate currency: virtual, anonymous, stateless. They represent true economic freedom, not subject to arbitrary manipulation by any government. Do we have any leads?”
“Not yet. But mark my words: we’re going to figure out who did this and we’re going to take them down … provided someone pays us a fair market rate to do so.”
“Easy, chief,” I said. “Any rate the market offers is, by definition, fair.”
He laughed. “That’s why you’re the best I got, Lisowski. Now you get out there and find those bitcoins.”
“Don’t worry,” I said. “I’m on it.”
I put a quarter in the siren. Ten minutes later, I was on the scene. It was a normal office building, strangled on all sides by public sidewalks. I hopped over them and went inside.
“Home Depot™ Presents the Police!®” I said, flashing my badge and my gun and a small picture of Ron Paul. “Nobody move unless you want to!” They didn’t.
“Now, which one of you punks is going to pay me to investigate this crime?” No one spoke up.
“Come on,” I said. “Don’t you all understand that the protection of private property is the foundation of all personal liberty?”
It didn’t seem like they did.
“Seriously, guys. Without a strong economic motivator, I’m just going to stand here and not solve this case. Cash is fine, but I prefer being paid in gold bullion or autographed Penn Jillette posters.”
Nothing. These people were stonewalling me. It almost seemed like they didn’t care that a fortune in computer money invented to buy drugs was missing.
I figured I could wait them out. I lit several cigarettes indoors. A pregnant lady coughed, and I told her that secondhand smoke is a myth. Just then, a man in glasses made a break for it.
“Subway™ Eat Fresh and Freeze, Scumbag!®” I yelled.
Too late. He was already out the front door. I went after him.
“Stop right there!” I yelled as I ran. He was faster than me because I always try to avoid stepping on public sidewalks. Our country needs a private-sidewalk voucher system, but, thanks to the incestuous interplay between our corrupt federal government and the public-sidewalk lobby, it will never happen.
I was losing him. “Listen, I’ll pay you to stop!” I yelled. “What would you consider an appropriate price point for stopping? I’ll offer you a thirteenth of an ounce of gold and a gently worn ‘Bob Barr ‘08’ extra-large long-sleeved men’s T-shirt!”
He turned. In his hand was a revolver that the Constitution said he had every right to own. He fired at me and missed. I pulled my own gun, put a quarter in it, and fired back. The bullet lodged in a U.S.P.S. mailbox less than a foot from his head. I shot the mailbox again, on purpose.
“All right, all right!” the man yelled, throwing down his weapon. “I give up, cop! I confess: I took t...
They didn't say that though. They just proposed that the blanket statement is baseless. As the parent states, I could as arbitrarily state that CEO's are underpaid. They also provide further explanation on what might dictate CEO pay, factors that some people might not consider when making such blanket statements. You on the other hand provide nothing constructive to the discussion.
I do not doubt that there are CEOs that are overpaid, as do I not doubt that there are those that get paid fair. Chants and overly ideological short stories aren't going to fix the problem with the former.
If every time someone says something as inoffensive as "CEO's are overpaid", people (who don't much care about inequality) jump and lash out and demand precision, they're just making the job of organizing and discussing that much harder.
CEO's are ovepaid. It's a fact. People are increasingly comfortable just saying this. A socialist sympathizer just made a decent bid for the presidency of the USA.
> Overpaid relative to what? Your estimation of perceived value? What do you define as value? How would you even begin to empirically establish what you're saying?
Some research has been trying to answer these questions, for example the MSCI study [1]. Anyone can play around with the collected data of public companies, for example the WSJ data model is kind of nice [2].
As a passive index small-time investor, this is of keen interest to me. My theory is passive indexing can potentially be supplemented in the future by specific value-oriented long-term Buffett-style investments in companies that establish a track record of promulgating a culture that successfully selects CEO's who deliver sustainable (5+ years) returns to shareholders, and CEO compensation linked tightly to such results is one of the signaling indicators I look for to draw attention to such possible organizations. Thus far in the US, I see very few companies who can pull this off, and unfortunately, they are all private, and precise returns are fuzzier than public companies and only theoretical.
I do not need five sigma results to discern actionable data. But the consistently relatively poor performance of CEO compensation to sustainable shareholder returns is one of my confirmation signals that passive broad indexing still works (like some fellow passive indexers, I believe under some specific conditions, the strategy will not work). If price discovery is broken in the CEO compensation market, then I'm better off ignoring it until it works.
Definitely YMMV. My style is not your style. Investing isn't my day job, and it isn't even my hobby; it is simply a facet of modern current life that I carry out as a duty, like flossing. I select for a strategy that can return results I can relatively count upon over long (20+ year) periods, with very little personal time (<80 hours per year) required. So while I am happy to listen to Bloomberg for example, I'm not so keen on a hands-on active investment to micromanage a portfolio.
There is little free market influence on public CEO salaries. Most CEOs can heavily influence board composition, as well as reward board members who please them. This divorces their salaries from market prices.
It's standard for companies that pay large bonuses (as a percentage of salary). That's the whole point. It's a carrot they dangle in front of you that you get to break off the string once a year.
I would hope that many (if not most) white-collar workers are getting some kind of profit sharing bonus, Christmas bonus, employee of the month, or some kind of incentive for a job well done beyond the bare minimum performance your salary is meant to represent. Certainly every office job I've ever had I've gotten periodic bonuses for doing a good job, and I've also not received bonuses in times when I did not do a good job.
I'd assume most tech workers. Most that i'm personally aware of 'bonus' have an individual performance multiplier attached. Can get <Standard> * 2 or <standard> * .5 depending how well you (and/or the company) performed that year.
Poor wording from my side I guess. I mean it seems like some companies has to offer bonuses to attract talent while only very successful companies or companies that sometimes compete for top talent offer it for engineers here.
Nearly every profession in the United States. CPAs, law firms, architects, etc.
I can't speak for the trades as I have no experience their but I imagine licensed plumbers and electricians that work for large companies get bonuses as well.
"Absolutely standard" for the financial industry, which is the context for this story. It's an industry well known for having a large part of compensation paid as a performance-based bonus.
If anyone ever pays a traffic ticket, it means taxes are too low. Consider: after paying the traffic ticket, they still show up to work! That means they would have shown up to work even if they had paid that money anyway, in the form of higher taxes.
This means if anyone ever pays a traffic ticket, for doing something wrong, it logically follows that everyone's taxes are too low. Otherwise how can they afford to pay it?
Do you see how this is an exact analogy for your "argument" (which is a logical error.)
We are talking about a punitive fine, for doing something wrong.
If you don't agree with my microeconomic analysis please make a graph (the supply curve) with your claim.
EDIT: downvotes, but no graph, I see. The simple fact is the gparent comment's suggestion is wrong. An elementary sketch of a supply curve would show that it is simply not a good argument. I guess rather than read what I wrote, people voted it based on political ideology. That doesn't make the economics suggestion true.
A traffic ticket vs. what this CEO did are so different that your analogy doesn't make sense. A traffic ticket has nothing to do with employment.
If a Wal-mart employee steals a candy bar they're going to be fired. This CEO who has the luxury of keeping his job when he does something much worse than stealing a candy bar.
Your analogy is a strawman because it has little to no relationship to what we're talking about.
>Doesn't this undermine the argument that CEOs need outrageous salaries to be incentivized to work, if you slash their salary, and they keep working?
You say, "if you slash their salary [AS A PUNITIVE MEASURE!!!] and they keep working", doesn't this undermine the argument that they need to be paid that much?
In very precise economic terms, no it doesn't. That is the answer to the question you just asked. Don't shoot the messenger, please.
Please realize that you asked a mathematical statement about microeconomics, which I answered. You asked this specific question: "if they keep working if we slash their salary, doesn't this undermine the argument that they need to be paid this much" and the answer is "no it doesn't."
You will probably grossly misinterpret this but suppose that you are among a group of exploitative managers who pay employees $1.17 per day. The way this is set up 0.17 is a bonus, $1 is the base payment. José, one of your best workers, has been showing up half an hour late every day. Finally you have had enough of this and say, "José, due to this lateness we are reducing your pay to only $1.13 per day next month." The following month José comes on to work on time, and starting the month after his $1.17 is reinstated.
Next at the next manager's meeting, the evil version of YPCrumble makes the same logical mistake that you just did. The evil YPCrumble twirls his mustache and says: "I noticed that José came to work on-time all this month, though he was ony being paid $1.13 due to being so late every day last month. But he came on time. So doesn't this undermine the argument that workers need to be paid $1.17? Since they are also willing to work for $1.13."
Let's step back from the MORALS. Does José's coming to work for $1.13 prove that the plant's 1,000 workers would work equally well for $1.13 that they do for $1.17? Couldn't the plant save $4 per day by slashing everyone's pay from $1.17 to $1.14?
Very simply NO IT DOESN'T. The fact that José showed up to work for $1.13 every day in no way, shape, or form show that $1.17 was too high. It is a simple and precise false microeconomics statement to say that it does imply this.
I am not making a political statement, just answering your question.
> Doesn't this undermine the argument that CEOs need outrageous salaries to be incentivized to work, if you slash their salary, and they keep working?
No, for a number of reasons.
1) His alternatives today could be substantially worse than when he started. If for no other reason, because of this mistake.
2) There may be large switching costs to changing jobs, and the reduction in salary may be non-substantial in comparison. This switching cost was a sunk cost when he initially joined, but will not be if he chooses to switch now.
Both of your points are symptoms of the problem that CEOs are vastly overpaid.
People are too picky choosing CEOs because they falsely believe that CEOs' high pay correlates to a large difference in performance from regular peasants. The truth is that many, many people could do a CEO's job. Everyone makes mistakes, this CEO's colossal mistakes are case-in-point.
If we stopped falsely believing that CEO's are magical superhuman lords in a world of serfs we would reduce their pay. Switching costs would reduce dramatically. So would our intolerance for mistakes that are naturally part of the human predicament.
> Both of your points are symptoms of the problem that CEOs are vastly overpaid.
How so? I fail to see how even if he was overpaid, either of my points are caused by (i.e. are symptyoms of) him being overpaid.
> People are too picky choosing CEOs because they falsely believe that CEOs' high pay correlates to a large difference in performance from regular peasants. The truth is that many, many people could do a CEO's job. Everyone makes mistakes, this CEO's colossal mistakes are case-in-point.
Based on what evidence? To make this conclusion, you need to compare the quantity and quality of mistakes made by current CEO's and would-be "peasant" replacements. I find it hard to believe you have a factual basis for estimating the types of mistakes your supposed replacement would make.
If you better understand what these CEO's do, I think you'll find the # of ppl who can ACTUALLY do their job is quite small, and it certainly doesn't include "regular peasants" or "many, many people".
Furthermore, these companies have hug market caps. If the optimal CEO generates 1% more company value than his best alternative, it's more than worth the tens of millions he's being paid.
41 comments
[ 5.5 ms ] story [ 79.2 ms ] threadDoesn't this undermine the argument that CEOs need outrageous salaries to be incentivized to work, if you slash their salary, and they keep working?
What does this mean? Paying CEOs is wrong? The pay that all CEOs get is wrong? The pay that some CEOs get is wrong?
Executive compensation is a construct of market consensus, not an absolute based on individual performance. The tangible value contributed by chief executive staff is one component of the compensation package, and what is valuable to the board or shareholders in aggregate may be utterly dissimilar to what you'd consider valuable. Your premise in why an executive should be paid is probably different from the premises used by those who actually choose what the executive will be paid.
The difficulty in finding an appropriate candidate, the risk of their having to publicly "fall on the sword" for the company, their contributed value, their particular skills/culture match, their years of experience, their network of available connections, etc all play a part in determining the compensation. And what's more, you may not measure each of these things with the same respective weighting or definition that the company would.
This is to say that you can arbitrarily say that executives as a class are overpaid, and I can arbitrarily say they're underpaid. You're free to propose a new compensation model, but for better or worse, most boards and shareholders seem fine with the status quo. Given that, it's not very productive to make a blanket statement about them being over or under-compensated if we can't establish that we're all working from the same set of premises.
You'd have about as much rigor in claiming that TSLA is overvalued relative to GM. Sure, you might be right, but 1) why listen to you rather than, say Zacks and 2) what makes your model of compensation more valid, when you have to surmount the burden of not just correctness but market consensus?
What is it going to take to make statements like "bosses are making too much money compared to their workers" popular again, so that people can actually mobilize and enact legislation to protect their own interests as a class?
Reminds me of this little short:
---
http://www.newyorker.com/humor/daily-shouts/l-p-d-libertaria...
I was shooting heroin and reading “The Fountainhead” in the front seat of my privately owned police cruiser when a call came in. I put a quarter in the radio to activate it. It was the chief.
“Bad news, detective. We got a situation.”
“What? Is the mayor trying to ban trans fats again?”
“Worse. Somebody just stole four hundred and forty-seven million dollars’ worth of bitcoins.”
The heroin needle practically fell out of my arm. “What kind of monster would do something like that? Bitcoins are the ultimate currency: virtual, anonymous, stateless. They represent true economic freedom, not subject to arbitrary manipulation by any government. Do we have any leads?”
“Not yet. But mark my words: we’re going to figure out who did this and we’re going to take them down … provided someone pays us a fair market rate to do so.”
“Easy, chief,” I said. “Any rate the market offers is, by definition, fair.”
He laughed. “That’s why you’re the best I got, Lisowski. Now you get out there and find those bitcoins.”
“Don’t worry,” I said. “I’m on it.”
I put a quarter in the siren. Ten minutes later, I was on the scene. It was a normal office building, strangled on all sides by public sidewalks. I hopped over them and went inside.
“Home Depot™ Presents the Police!®” I said, flashing my badge and my gun and a small picture of Ron Paul. “Nobody move unless you want to!” They didn’t.
“Now, which one of you punks is going to pay me to investigate this crime?” No one spoke up.
“Come on,” I said. “Don’t you all understand that the protection of private property is the foundation of all personal liberty?”
It didn’t seem like they did.
“Seriously, guys. Without a strong economic motivator, I’m just going to stand here and not solve this case. Cash is fine, but I prefer being paid in gold bullion or autographed Penn Jillette posters.”
Nothing. These people were stonewalling me. It almost seemed like they didn’t care that a fortune in computer money invented to buy drugs was missing.
I figured I could wait them out. I lit several cigarettes indoors. A pregnant lady coughed, and I told her that secondhand smoke is a myth. Just then, a man in glasses made a break for it.
“Subway™ Eat Fresh and Freeze, Scumbag!®” I yelled.
Too late. He was already out the front door. I went after him.
“Stop right there!” I yelled as I ran. He was faster than me because I always try to avoid stepping on public sidewalks. Our country needs a private-sidewalk voucher system, but, thanks to the incestuous interplay between our corrupt federal government and the public-sidewalk lobby, it will never happen.
I was losing him. “Listen, I’ll pay you to stop!” I yelled. “What would you consider an appropriate price point for stopping? I’ll offer you a thirteenth of an ounce of gold and a gently worn ‘Bob Barr ‘08’ extra-large long-sleeved men’s T-shirt!”
He turned. In his hand was a revolver that the Constitution said he had every right to own. He fired at me and missed. I pulled my own gun, put a quarter in it, and fired back. The bullet lodged in a U.S.P.S. mailbox less than a foot from his head. I shot the mailbox again, on purpose.
“All right, all right!” the man yelled, throwing down his weapon. “I give up, cop! I confess: I took t...
I do not doubt that there are CEOs that are overpaid, as do I not doubt that there are those that get paid fair. Chants and overly ideological short stories aren't going to fix the problem with the former.
CEO's are ovepaid. It's a fact. People are increasingly comfortable just saying this. A socialist sympathizer just made a decent bid for the presidency of the USA.
Some research has been trying to answer these questions, for example the MSCI study [1]. Anyone can play around with the collected data of public companies, for example the WSJ data model is kind of nice [2].
As a passive index small-time investor, this is of keen interest to me. My theory is passive indexing can potentially be supplemented in the future by specific value-oriented long-term Buffett-style investments in companies that establish a track record of promulgating a culture that successfully selects CEO's who deliver sustainable (5+ years) returns to shareholders, and CEO compensation linked tightly to such results is one of the signaling indicators I look for to draw attention to such possible organizations. Thus far in the US, I see very few companies who can pull this off, and unfortunately, they are all private, and precise returns are fuzzier than public companies and only theoretical.
I do not need five sigma results to discern actionable data. But the consistently relatively poor performance of CEO compensation to sustainable shareholder returns is one of my confirmation signals that passive broad indexing still works (like some fellow passive indexers, I believe under some specific conditions, the strategy will not work). If price discovery is broken in the CEO compensation market, then I'm better off ignoring it until it works.
Definitely YMMV. My style is not your style. Investing isn't my day job, and it isn't even my hobby; it is simply a facet of modern current life that I carry out as a duty, like flossing. I select for a strategy that can return results I can relatively count upon over long (20+ year) periods, with very little personal time (<80 hours per year) required. So while I am happy to listen to Bloomberg for example, I'm not so keen on a hands-on active investment to micromanage a portfolio.
[1] http://chiefexecutive.net/higher-ceo-pay-produce-better-comp...
[2] http://graphics.wsj.com/ceopay-2015/
Taking a hit to your bonus because you messed up big time is perfectly standard.
The job I'm starting in next month has though.
Here in Norway bonuses doesn't seem to be considered mandatory.
I can't speak for the trades as I have no experience their but I imagine licensed plumbers and electricians that work for large companies get bonuses as well.
Do you see how this is an exact analogy for your "argument" (which is a logical error.)
We are talking about a punitive fine, for doing something wrong.
If you don't agree with my microeconomic analysis please make a graph (the supply curve) with your claim.
If a Wal-mart employee steals a candy bar they're going to be fired. This CEO who has the luxury of keeping his job when he does something much worse than stealing a candy bar.
Your analogy is a strawman because it has little to no relationship to what we're talking about.
>Doesn't this undermine the argument that CEOs need outrageous salaries to be incentivized to work, if you slash their salary, and they keep working?
You say, "if you slash their salary [AS A PUNITIVE MEASURE!!!] and they keep working", doesn't this undermine the argument that they need to be paid that much?
In very precise economic terms, no it doesn't. That is the answer to the question you just asked. Don't shoot the messenger, please.
Please realize that you asked a mathematical statement about microeconomics, which I answered. You asked this specific question: "if they keep working if we slash their salary, doesn't this undermine the argument that they need to be paid this much" and the answer is "no it doesn't."
You will probably grossly misinterpret this but suppose that you are among a group of exploitative managers who pay employees $1.17 per day. The way this is set up 0.17 is a bonus, $1 is the base payment. José, one of your best workers, has been showing up half an hour late every day. Finally you have had enough of this and say, "José, due to this lateness we are reducing your pay to only $1.13 per day next month." The following month José comes on to work on time, and starting the month after his $1.17 is reinstated.
Next at the next manager's meeting, the evil version of YPCrumble makes the same logical mistake that you just did. The evil YPCrumble twirls his mustache and says: "I noticed that José came to work on-time all this month, though he was ony being paid $1.13 due to being so late every day last month. But he came on time. So doesn't this undermine the argument that workers need to be paid $1.17? Since they are also willing to work for $1.13."
Let's step back from the MORALS. Does José's coming to work for $1.13 prove that the plant's 1,000 workers would work equally well for $1.13 that they do for $1.17? Couldn't the plant save $4 per day by slashing everyone's pay from $1.17 to $1.14?
Very simply NO IT DOESN'T. The fact that José showed up to work for $1.13 every day in no way, shape, or form show that $1.17 was too high. It is a simple and precise false microeconomics statement to say that it does imply this.
I am not making a political statement, just answering your question.
No, for a number of reasons.
1) His alternatives today could be substantially worse than when he started. If for no other reason, because of this mistake.
2) There may be large switching costs to changing jobs, and the reduction in salary may be non-substantial in comparison. This switching cost was a sunk cost when he initially joined, but will not be if he chooses to switch now.
People are too picky choosing CEOs because they falsely believe that CEOs' high pay correlates to a large difference in performance from regular peasants. The truth is that many, many people could do a CEO's job. Everyone makes mistakes, this CEO's colossal mistakes are case-in-point.
If we stopped falsely believing that CEO's are magical superhuman lords in a world of serfs we would reduce their pay. Switching costs would reduce dramatically. So would our intolerance for mistakes that are naturally part of the human predicament.
How so? I fail to see how even if he was overpaid, either of my points are caused by (i.e. are symptyoms of) him being overpaid.
> People are too picky choosing CEOs because they falsely believe that CEOs' high pay correlates to a large difference in performance from regular peasants. The truth is that many, many people could do a CEO's job. Everyone makes mistakes, this CEO's colossal mistakes are case-in-point.
Based on what evidence? To make this conclusion, you need to compare the quantity and quality of mistakes made by current CEO's and would-be "peasant" replacements. I find it hard to believe you have a factual basis for estimating the types of mistakes your supposed replacement would make.
If you better understand what these CEO's do, I think you'll find the # of ppl who can ACTUALLY do their job is quite small, and it certainly doesn't include "regular peasants" or "many, many people".
Furthermore, these companies have hug market caps. If the optimal CEO generates 1% more company value than his best alternative, it's more than worth the tens of millions he's being paid.