If you were a CEO and your board & investors thought you were worth $50M a year, presumably you would decline that out of selflessness and insist upon a much more reasonable living wage?
The real question is why the board continued to increase executive compensation to such staggering ratios.... until you realize that boards are made up of networks of other executives, and there is a large "upward current" to reward one another and thereby boost ones own salary.
But your question is really inane. It's not about the individual choice to accept compensation, it's about a system for corporate advancement that creates such pressure for outsized wages at the top.
The boards try to maximize ownership value, and I think they genuinely believe thar if they give CEO the stock options that is also making the stock price to go up on average.
Pointing to a single person and declaring that to be where the failing is and that to be the source of the inequality we're seeing here is insufficient.
There's a real chance that the board has actively refused to allow increase in the lower level people's wages at the company.
It's not just that the guy at the top makes a lot extra, but also that the people at the middle and the bottom don't.
If you were CEO that was worth $50m/year why would you work for anyone else?
I have met almost no CEOs who were actually skilled AND were happy working for someone else. If you are worth $50m/year to the company, you are worth substantially more if you take that money and started your own company (the reason why most CEOs don't, and all the good ones do is because most CEOs are terrible).
Not really no...Companies typically don't want to lose their CEOs so with the accounting change they are incentivized to give out larger and larger stock comps.
Combine that with the rocketship of the market these past 20 years....
CEOs used to get more explicit perks. I've seen an entire airport devoted to getting the mail so that the CEO could work from a company owned lodge in the mountains in the summer.
I remember something about Google founders/CEOs getting an entire NASA airship hangar for their private carbon-neutral 747 party plane or something, but maybe that is mixing up stories.
NASA/Air Force was decommissioning the hangar at the base, and Google happens to be their next door neighbor. They rented to hangar to Google, and Google used it to park their corporate jet (and maybe a few private jets of some pre-IPO employees).
It was actually a good thing, it brought money in for NASA.
This is a fun counterpart to the pg post that made the front page today also. CEO-to-worker compensation ratio is an interesting data point showing that there's more to "how people get rich today" than just "tech startups are easy money".
How is this a counterpoint? It's just a couple numbers thrown around to fan the flames. There is no effort to analyze the numbers, and deliberate effort in the opposite direction:
"Last year, McDonald’s boss Steve Easterbrook earned $21.7m while the McDonald’s workers earned a median wage of just $7,017 – a CEO to worker pay ratio of 3,101 to one. The average Walmart worker earned $19,177 in 2017 while CEO Doug McMillon took home $22.8m – a ratio of 1,188 to one."
Comparing ratios of yearly earnings between a CEO and part time workers can only be deliberate manipulation of numbers. This article is garbage designed to outrage and that's all it is.
>How is this a counterpoint? It's just a couple numbers thrown around to fan the flames. There is no effort to analyze the numbers, and deliberate effort in the opposite direction
As opposed to the garbage PG pulled out of his ass for his blog?
Also comparing CEO pay with hourly part time pay is completely on-point, as CEO's famously do very little work unless you count networking at the golf course as billable hours.
As someone here said just days ago 'Jesus Christ himself isn't worth 500x' I would add especially since the low wage hourly workers are almost always the ones making the actual money for the business.
Do we think that the amount of leverage a CEO has over the operations and output of a company has increased or decreased since 1989, as a result of tech?
My wager is that this has increased significantly more than 6x.
Probably decreased quite a bit. CEOs are more beholden to shareholders than ever. They aren't even appointed from within: typically shareholders will just hire some mercenary from outside to do the job for a few years, perhaps even solely to absorb public flak and draw blame from the wider company, before being tossed aside for another disposable mercenary CEO.
When you hear "CEO" most people think of Steve Jobs, Bill Gates - famous CEOs that are the face of their company. The vast VAST majority are not famous nor even the face of the company.
Is it net pay? If not then the gap is even higher as workers pay more tax than CEOs (if your salary is beyond certain threshold, you can use various "tricks" to make your tax bill go away, whereas workers have to typically pay something in the area of 40% or more). It's a scandal. Each party tells us that they will tax the rich, but what they really mean is taxing your specialists, developers, doctors, lawyers. People who worked hard all their life to get a great job and some to also lift themselves and their family out of poverty.
I know that California has very high sales tax and very high state-level income tax and those can add to federal income tax; but, federal income taxes aren't anywhere near 40% for people that make an average income.
I am paying in the area of 40-45% in the UK. I talked with someone from the US about this and they said they pay similar in the US. I checked for New York and got 37% which is quite in the ballpark. Is it much different in other states?
edit: wow. I'm being downvoted quite a bit here. What am I saying wrong? Where am I wrong? Clearly I must have some misunderstanding of how taxes work, can someone clarify it for me?
> Americans tend to treat taxes and social security as separate, though.
Here is similar, but for some time now the government can transfer money between pots (e.g. spend social security money on something else), so essentially this is just cosmetic.
Out of interest, what tricks are these (genuine question)? Stock grants are often taxed less (but not 0). In the UK at least I don't know any real 'tricks' to get rid of £10m salary for a CEO. You will be paying around 47% marginal tax on that.
Incorporate yourself and have your salary be paid as management fees to the corporation. Declare those fees as a capital gain and pay 15% tax. Or, have the corporation housed in a tax haven, pay almost nothing in taxes.
Setup a foundation, use that foundation to employ friends or relatives (like say, your wife). Pay out very little in charity but take your donations to the foundation as a tax write off. Etc.
>Declare those fees as a capital gain and pay 15% tax.
That's tricky. You can't just take money out of the corporation's coffers and say it was capital gains. You'd need to sell off your shares or something. Otherwise it's a dividend and is taxed as income.
>Or, have the corporation housed in a tax haven, pay almost nothing in taxes.
You still need to repatriate it back to your personal account somehow.
>Setup a foundation, use that foundation to employ friends or relatives (like say, your wife).
...which they're promptly taxed on. Actually you don't even need a foundation, you can just employ them at the corporation from earlier.
I don't think any CEO can just incorporate themselves like that. They have a bunch of duties to do and the company would want them being 'personally' responsible for them.
That's taking total productivity and dividing it by workers and then calling it "worker productivity".
What's pertinent is whether increases in productivity are directly attributable to the workers in the denominator, or whether there are other reasons for that growth. Furthermore the denominator in that graph is not actually the total workers involved in the productive output of an economy... for example, the billions of workers added to the work force but who work in developing countries for slave wages aren't factored in to the denominator of total workers, but their output does contribute to the numerator.
I don't see why we care about CEO pay vs. worker pay at all. Being a CEO isn't part of the deal you get from the company as a normal person. What you get is a salary, benefits, security, and a growth path in your career. Have those things changed significantly during that time period?
Not to say the discrepancy is justified, but a few points:
1) Globalization has led to larger companies. The larger the company, the higher the pay you'd expect for the CEO (value of each decision is greater).
2) Technology has allowed margins to improve via cheaper cost to scale... economies of scale etc.
3) As another commenter noted, the impact of a CEO is relatively more than in the past, due to advancing technology. More social media presence, more effective means of communication across the company and so on, meaning their decisions are able to effect change more quickly.
4) Globalization has led to reduced wages at the bottom. Unskilled labor is paid less than ever due to that work being outsourced to China, Mexico etc. Some of the change may be more of a story of effective wages falling for the lowest worker.
5) Public CEOs are compensated mostly in stock, and interest rates continue to get lower and lower. Government has been much more aggressive with stimulus than in the past. This has juiced stock valuations.
I'd be interested in seeing how the gap has changed in "like-for-like" businesses. e.g. a 10 person construction company in 1989 vs today.
I heard that argument before, but we don’t know what the layers in between look like. The higher you are, the more growth you can claim responsibility for, and demand a piece of the pie accordingly.
That's the trillion dollar question. Preferential attachment (winner-takes-all) seems something like a natural law. The pink elephant in the living room, which no one dares mention for fear of catching the attention of the elephant.
Because CEOs aren't a commodity. As the board, you don't want a CEO for the cheapest price, you want the best CEO you can get your hands on. That's the same reason why athletes/actors are paid millions despite literally billions of other people willing to take the job for less.
Athletes and actors have very direct performance stats. For one, they only compete with other people doing the same job. Athletes have literally every footstep of their on field career recorded, the stats sliced and diced. Every movie is its own project with a PnL.
CEOs are working in much more vague competitive environments.
- Sports people are literally recorded for every step they take. CEOs not so much.
- Attribution is whole different issue when you've got a years long strategy. By contrast in sports there's rarely a player left from the team of 10 years ago.
- Sports are made to be repeatable. Business evolves.
Every decision CEOs make is recorded. And attribution on sports success is also related to the other team members, the coach, the support given to the team, the infrastructure of the sport, the team doctors, etc. Sports teams definitely have years long strategies.
I'm just not buying your claim that sports stars can justify their extraordinary salaries while CEOs cannot.
No it isn't? You're comparing a literal where-was-Ronaldo-at-frame-768 with what the CEO does in his office all day. There's no way he's recorded in the same detail.
With sports you can say "this guy is the fastest, he will outrun everyone and that's useful". Or "this guy provided x assists". Or "this guy saved x number of shots". Players take shots many many times, so you can separate the good ones from the bad ones, due to high n.
There's no comparably clear measurement you can make on a CEO, because there aren't that many strategic decisions to make, and they aren't repeated. Once you've decided to buy that VR goggle startup, it won't be there anymore to tell you what would have happened otherwise. All you can have is a relatively small number of facts from which you can build a story.
> And attribution on sports success is also related to the other team members, the coach, the support given to the team, the infrastructure of the sport, the team doctors, etc. Sports teams definitely have years long strategies.
High number of observations and low number of team members in sports allows you to at least guess at replacement value. Eg LeBron really is better than the next guy, because we can see what happens when he's not there. And every game is comparable because it's set up that way. With business the landscape changes from the outcomes of the decisions, so it's pretty hard to figure out the counterfactuals.
Um, decisions are recorded in meeting minutes. They're also on record because they get implemented.
Players do a lot of unrecorded influential moves, like team-building, mentoring, training, etc.
The game environment changes, too, as you're up against different teams, and teams evolve their strategy just like businesses do. The players change, the teams change, the strategies change, the other teams change, all on a constant basis.
The key is repeatability in the stats. You can play wide, you can play with a high line, etc. But there's loads of games to look at, and you can see how one decision works vs another, because there's repeated experiments. Granted, modelling isn't some sort of objective thing, but you have better comparability.
They're vague until you put metrics on them. Like basketball didn't used to track assists. There's nothing inherently vague about CEO performance; they're not like mystic wizards marshaling arcane forces. We just don't dehumanize them into stats because, well, status.
Elizabeth Taylor famously demanded and got a million dollars to star in "Cleopatra", the biggest contract ever at the time.
But it was darn well worth it. The movie was a huge hit, and a big reason for that was Taylor's star power.
I'm sure they could have gotten an endless supply of starlets who would have done it for free, or even paid to play the role. But that wouldn't have been a good business decision for the producers.
Hmmm. This may sound a bit crazy but I wonder if some sort of "moneyball"-type strategy would work for CEO development and recruitment...
I'm not sure who would be the general manager, how to replicate the functions of high school ball and the minor leagues, or how you could acquire the necessary data / stats... but I feel like there is some potential here!
An acquaintance of mine was working on an accounting PhD on basically this subject (trying to quantify CEO contribution to revenues and profits, all else held equal). He said that after years studying it, he thought it's too noisy with too little data over too long a timeframe to do a good quantitative analysis.
He also pointed out there is a big "apples to oranges" problem even with the limited data available. In sports (but not business) you have lots of reliably tracked micro metrics in addition to final metrics (wins/revenue). The micro metrics are generated regularly (stats for each player for each game) and those metrics are portable across players (everyone is going for points, runs, blocks, whatever). In comparison, for CEOs you mainly have quarterly reporting of coarse financials (but nothing like employee morale, number of offices opened, etc.).
Oh wow, very interesting. That all makes sense. The lack of consistent, comparable data is a huge issue. The complexity space that CEOs operate in is many orders of magnitude larger than in sports, and it also far more dynamic and chaotic. It seems pretty intractable.
2 - The New Deal's Capital's accommodation to Labor was to share the boon of increasing productivity (surplus). Neoliberalism (Reaganonmics) ended that foolishness.
3 - CEO compensation is merit based?
4.1 - aka Glut of labor.
4.2 - I'm curious what our future leaders will do to remedy today's glut of capital, the by product of decades of labor glut without the benefit of appropriate profit sharing.
But Reagan gets the credit. And Gov Reagan and others had agency too. "Reaganomics" is just short hand for when that agenda became the dominate policy.
My post was meant to be factual rather than advocating specific policy positions.
It's important to consider absolute quality of life in addition to inequality. "Equality" is a relative measure, but what matters in the end is how well each individual is doing.
I'm in favor of policies that would help the less fortunate, though we need to be careful to implement them in an effective way.
I do think manufacturing will shift from globalization to localization once enough of the process can be automated. Once shipping costs start to exceed production costs, manufacturing will move back home. Of course, if the manufacturing is automated, it means those jobs aren't coming back. This also depends on whether it's cheaper to ship the raw materials vs the finished product, and where those materials can be sourced from.
That being said, a lot of the recent rise in inequality has been driven by government policy. Some things like housing are becoming prohibitively expensive to most due to short term focused policy by the Fed and perhaps congress as well.
The policy reaction we've seen has been quite effective, but is creating many potential asset bubbles that can cause bigger problems down the line.
These bubbles obviously inflate the wealth of the rich and lead to much greater inequality (often described as the k shaped recovery).
Hyper targeted policy, and letting things reach equilibrium through mostly free market forces often produces healthier outcomes in the long run.
Right, the military leadership is underpaid. Not winning a war stinks. Why risk it on second tier leaders because the first tier hit the private sector?
Exactly. #1 is a big factor--the proper comparison is of CEOs of equal-sized companies. That data is very hard to find because it doesn't support the notion that CEO salary has run away.
Yup, compensation ratio is a false narrative. My CEO makes 100x more than me (roughly $30M). But he is not 100x better at being a CEO than I would be; he may only be 2x better than me. The reason why he is paid 100x is because his decisions have the ability to affect billions of dollars in revenue, so having him as CEO instead of me could mean the company brings in an additional $300M in revenue next year. If you assume that he's bringing in $300M more than I would bring in, paying him $29.7M more than me does not seem unreasonable.
Overall, the CEO:worker pay ratio is a pretty meaningless statistic. At most companies, even if you were to entirely redistribute the CEO's salary to the employees, the employees still wouldn't see significant wage increases. For example, dividing Bob Iger's $47M salary amongst Disney's 155k employees would only result in a $300/year pay raise for each employee. People hoping to solve poverty by slashing CEO compensation are going to be sorely disappointed.
Yes, Disney is very large but CEO pay isn't proportional to employee count. If Elon Musk's compensation (almost $600m in 2019) was divided amongst Tesla's 70,000 employees, that would be ~$8,500/employee. If Sumit Singh's compensation (~$108m in 2019) was distributed amongst Chewy.com's employees (9,800 in 2019), it would be ~$11,000/employee.
No one thinks bringing CEO pay back to Earth will solve poverty by itself.
The compensation is a function of supply and demand. A CEO is hard to replace and their experience is vital to the company's performance. Corporate drones are easy to replace with minimal training, so it's the lowest bidder market.
There used to be a cycle. Companies would grow huge, eventually becoming overbureaucratized inefficient behemoths where personal competence is replaced by carefully designed corporate manuals. And in the next economic turn they would crash, opening the market to the next wave of lean founder-driven companies.
We broke this cycle in 2008 with bailouts and we are printing money ever since to keep the party going [0]. So yes, CEOs and shareholders now have considerably bigger leverage than workers. The companies are tactically inefficient (good luck getting a competent person anywhere), but strategically unbeatable due to scaling. Competing with them is practically impossible because offering services below cost is now a widely accepted practice, and if by some magic you managed, they will just buy you off. People who didn't get the foot in the door before 2008 are miserable and walking around with pitchforks looking for the next target. But thanks to what the media does, they only end up stabbing each other over made-up differences.
"Corporate drones" aren't replacable. CEOs are, you can find almost anyone willing to a sub-standard job for $1m/year...the supply is really infinite.
The issue with high employee turnover is they are producing your product. As an investor, high employee turnover is almost always very bad. CEO turnover is usually totally fine (it depends, if a new CEO comes in and attempts to do anything bold...it is usually curtains).
It doesn't work this way. Unless you have a union or some large economic event, people will make resignation decisions independently. This means that the number of resignations on a typical day will follow a normal distribution a.k.a. bell curve. Say, you have 3650 employees with an average tenure of 1 year. It means that on 90% of the days you will have between 0 and 10 resignations, averaging at 1 per day. You also know that out of 10 applications, 1 leads to a hire, so you have an HR team with a target of reviewing 10 applications per day and hiring 10% of them. Due to scaling, you can redistribute the same amount of work between 3650, 3550 or 3750 employees without any difference in output.
If a single employee comes demanding a raise, they have 0 leverage over you. If you fire them, you will have 3659 employees for a day or two (until more candidates get hired) with your business designed to handle fluctuations between 3660 and 3750. It costs you zero, literally ZERO.
High turnover for low-wage jobs actually makes it better for the business. It's like if you already have a leaky basement with a sump pump in place, you won't even notice if you spill a single bucket of water there.
For a smaller business of 10 employees, replacing one could be harder. Sharing their workload over 9 people is harder. The owner will have to spend their own time searching for a replacement, remembering the things that the departed person knew and trying to teach them to the replacement, etc. That's why smaller companies treat people better.
As for the CEO, you can find people willing to do the job, but there's a big difference between willing and being able to. The main role of CEO besides giving a good public image is to keep the internal corruption and infighting at a level where it doesn't kill the company's business. Despite the fake smiles and positivity, it's a pretty dirty backstabbing environment and you need to know certain unwritten rules to play that game.
People at scale work differently from people in person. They will not be independent if there's a sudden drastic change (let's say a ban on work-from-home) or if there is a parallel hierarchy among your employees (e.g. a union) that would orchestrate a coordinated strike/resignation. Such unions are typically driven by power-motivated people that for some reason are not interested in the regular management ladder.
The corporations are handling it very well for their own bottom line: the people that could theoretically organize unions are now happily giving talks about privilege and forcing others to hate each other and compete for the artificially restricted pool of positions and zero-expense privileges (hello, pronouns), rather than coming together and refusing to do their work until everyone gets better terms.
CEO pay is a red herring in respect to income inequality. Companies today are over 6x bigger today than they were in 1989. Even if they got paid 6x more, CEOs as a whole aren't taking any more wealth from the company than they used to. Wealth inequality primarily comes from the concentration of equity. The richest CEOs all make negligible compensation. Bezo's salary is roughly $80k and Zuckerberg's is $1.
Isn't salary a "red herring" in CEO compensation? I know that you know this but I'll remind you. It's mainly stock options/shares, not the $1 or $80k salary lol
Looking only at the base pay completely misses the picture for CEO compensation as you have noted. Obviously Bezos didn't make $13B in a single day from his $80k/year salary.
Imagine if he took that 13 Billion Dollar single day income and spread it across every employee at Amazon. That would be a life changing amount of money for almost every warehouse worker. Roughly $22,500 each. And that's just one day for Bezos.
The value of Amazon is based on their labour force and their willingness to work under the conditions they do for the pay they get.
If you give all of them 22k, a lot of them will use that money to jump ship. The value of Amazon will go down.
The value of a corporation is the _willingness of their staff to cooperate_. For low skill workers, higher pay can enable them to work their way up to higher skill jobs, which reduces their willingness to cooperate at the low wage job, which reduces the value of the cooperation.
I feel like I just earned a nobel price in economics, but I guess a real economist will quickly put holes in my epic bubble^^
I mean I'm not making the argument that this is a good idea, but if your company runs on low skill workers working very hard for very low pay, keeping them low skill is key to keep them willing to work that job.
Maybe I'm being disrespectful to these job, assuming that skilling up won't make them more productive and valuable.
this focus on the value of his stocks, and their fluctuations, is silly.
not only could he not liquidate all of his holdings in under a few years without killing the stock price (and making the later sales worth less), but part of the value of amazon is bezos' oversight. if he dumps all his stock, the public elects a new board, which elects a new chairman, and they pick some new CEO, amazon wouldn't be worth as much as it is now.
(also he'd bleed away a chunk of whatever he sold off in capital gains taxes. his cost basis is presumably somewhere near $0, since he founded the company and has held from the start.)
The bigger myth is that CEOs need to be paid more to be more productive. There's this silly idea that if you pay the same CEO 10x more, they suddenly become 10x as valuable to the company. CEO skill isn't some magical thing that scales infinitely with compensation, and these hundred million dollar compensation packages are grossly inflated to what they should be.
you've got it backwards. probably because it sounds more dramatic.
of course paying someone more doesn't make them more valuable, in the same way paying extra for lunch doesn't make it a better lunch.
rather, they're valuable to you, so you pay them more. in the same way that lunch at the high end restaurant costs more.
perhaps the best CEOs, with their wealth of connections, aren't worth the additional cost. (like an overpriced restaurant.) interestingly, that's an investable thesis! you could go invest in companies with the cheapest CEOs. i look forward to hearing about your returns!
If you short the most expensive CEOs, you will do very well. I have been doing this for a long time. Weak CEOs are a prime source of alpha because the irrational behaviour that leads to them becoming CEOs (like thinking you need to pay 2x to get 2x output) is structual.
Also, your view is based on one of the great lies that CEOs tell shareholders. CEOs do better when they are fully invested, and (the argument goes) big pay aligns incentives. It doesn't. Most CEOs cash out their options, buy a McMansion, and waste all their money. If you want to do well: you buy businesses that don't rely on CEO skill (if you rely on a skilled CEO, you are done for...you aren't getting one), and you align incentives (i.e. no option cashing, the CEO has 99% of their wealth invested permanently).
How do you short companies for a long time? To exploit a correlation between CEO compensation and stock-market returns, you surely need to hold a short position for years? I just can't see how to do that profitably given the high costs of shorting individual companies.
>There's this silly idea that if you pay the same CEO 10x more, they suddenly become 10x as valuable to the company.
No one actually believes that. The problem is that if you don't pay a capable CEO 10x more, they are gonna leave elsewhere where they can get paid 10x more. And the only people to replace them who wouldn't be asking for the same amount of compensation are not the kind of people you would want to be your CEO.
As others have said, CEOs aren't a commodity, just like top tier athletes and actors aren't. LeBron gets paid multiples of what his teammates make [0]. Most of his teammates on LA Lakers earn single digit low millions (with the average being even lower), while he made $39mil from his contract last year. Is he providing 10 times the value to the game that his teammates making under $3mil/yr do? I doubt it. But if you want LeBron, you gotta pay it up, because there isn't a lack of other teams out there who would be more than happy to pay him as much.
They aren't. In almost every case I have seen, the big CEO job will be the peak of that person's career.
And CEOs are not like top tier athletes. The comparison is ludicrous because most CEOs are paid like Lebron but have the skill of his teammates. The number of actually good CEOs is far smaller than the number of CEOs...as in, there is usually one proven value creator per 10,000 CEOs.
Btw, my sample isn't small. I worked in equity research, I can only think of one CEO I have personally come across who was actually good. One out of thousands (I say personally, there are probably ~5 that I have come across outside of my circle). Your average CEO is not just bad, they are usually actively harmful (because they tend to view becoming CEO as an achievement, they tend to apply few standards of common sense to their decision-making, the way Boards incentivize behaviour also makes no sense).
The reason why this happens is two-fold: there is a culture of "the CEO", and most Boards are full of people who were also CEOs and believe they were very special. It is possible to prove this behaviour is irrational quite easily: how many CEOs have done nothing but fail, and still get hired? Lots.
>The comparison is ludicrous because most CEOs are paid like Lebron but have the skill of his teammates.
I agree with you on this. However, do you expect the CEOs who are willing to take a comp that is x10 less to be just as good? Something tells me they won't be.
Like, sure, an average software dev even at a highly paid place like Google is "decent", not "great" (like LeBron would be in this analogy). However, do you think that Google would be willing to just switch to hiring all those other "mediocre" devs from Infosys or Tata for $40-50k/yr? After all, Google's own engineers are just "good enough" on average, and that would be a massive money saver. And yet they don't do it, and neither do their competitors.
Yeah, Tata and Infosys both have tons of people employed as software devs for pennies. They both make money by letting their clients outsource their workforce with Tata providing that workforce and billing at much higher rates than what those people earn, thus getting a really really nice profit margin. Nothing wrong with that in concept, but the way they went about it was terrible, especially considering that they were paying those devs like $40k/yr in Bay Area (which is an insanity).
That was the whole premise of the big H1B visa controversy, with most applicants from more "legitimate" tech companies and outside of that being pissed off that they have to participate in the visa lottery due to most of the visa cap each year taken by Tata and Infosys employees who each get paid much less (which, in turn, makes the justification for H1B visa for them much shakier).
That's part of the myth though, and your example is a great point supporting that. Sports franchises don't invest in top names because of performance, they invest in top names because it's marketing gold. These athletes of course have to perform well, but their value in performance becomes detached from their pay as they become more and more valuable for their marketing to the franchise. It's the same thing with CEOs and shareholders. When you pay outrageous compensations for CEOs, shareholders look in awe as that CEO must be amazing if they are receiving such high compensation, and as long as they do a decent job, they feel justified; it's one big positive feedback loop.
It's how mediocre CEOs like Marissa Mayer was able to get over $200 million in compensation, even though her background, while impressive, didn't warrant it. Yahoo shareholders ate that up. Take a look at someone like Shaquille O'Neal, who was able to command a 20 million dollar contract in 2009 even when he was at the end of his career and past his prime. He was marketing gold for his team.
The article says "compensation", from my understanding that includes equity and bonuses and all that, so it does seem to be comparing the full package of CEOs against the full package of workers.
Yes. I don't see that a person is being treated more fairly working in a 1,000 employee company where the CEO earns $1m than working in a 10,000 employee company where the CEO earns $10m. The arithmetic says there's no difference - the "CEO tax" is the same for workers in each.
The average size of companies in the US has increased dramatically and there has always been a very strong correlation between CEO compensation and the size of the company they lead. By ignoring this obvious confounding variable, the article undermines - maybe deliberately - the reader's ability to interpret the data. But then I believe the author's purpose is to generate heat/outrage rather than light.
I mean it seems to me that an obvious question raised by this trend is why are companies getting bigger on average? And why are companies bigger in developed economies than developing ones[1]?
Is there a natural limit to this growth in average company size? Or are we heading towards the entire economy being dominated by a few super-massive corporations?
Maybe this is a wrong thinking, but sometimes I feel like big tech companies would be able to grow their profit faster by not increasing the amount of engineers so aggressively instead of the salary of great engineers (and kicking out engineers who are just good). At Google I felt that over time it was harder to make any change because of the huge overcomplicated code base for example (the scary part though is that I'm more a good engineer, I had seen much better SWEs around myself).
The problem I think is that at a certain point, it stops being an engineering problem and starts becoming an organization/communication/coordination problem. You could have all the best engineers but if they’re not coordinated correctly, it still becomes a mess.
And that’s ignoring the problem that messes are inevitable, because programs must eventually deal with the real world, and the real world is a shitshow. Changing requirements, abominable external interfaces, business logic generally, etc.
The main draw for unnecessarily messy codebase however is putting novices in charge, but you don’t need to overpay to avoid this (and you don’t really need the best of the best) — you need better selection practices, and I’m not sure anyone’s ever found a good way to select new resources (hiring interviews have at best a very spotty record, and a very shallow filter)
Lean teams of A+ engineers deliver great results, but they still do so at a slower pace, though more consistently. And contrary to popular belief, it is quite difficult to maintain such a team, attrition will happen naturally and cause problems for it over time.
For a big tech company, it is thus faster for them to just grow the number of teams and engineers, and give them each smaller and smaller chunk of an overall more and more complicated set. Basically, it's like throwing money at the problem, but it works.
You bootstrap some new product, program or feature quickly, the effort could be led by a single or a handful of A+ engineer and some PMs. And then you create a whole team to forever maintain it composed mostly of junior and mid with high attrition rates.
Compare and contrast the executive compensation to the weakening power of employee unions. In the past executives needed to be diligent about how executive compensation would affect union negotiations. It would be very hard to squeeze unions while dramatically increasing executive compensation. With weakened labor unions, there is no need to maintain the curtain of equity of treatment of labor vs executives.
- To make it to the top, you need an aura around your persona. How often do you see an anointed one or two, among thousands? It's corporate religion essentially, the politics reduces the field unnecessarily to the level where there's just a handful of crown princes.
- Similar to sports, people try to split hairs about who is good enough and who isn't. Nobody's ever heard of randomness and serendipity. Add to that a total lack of controllable evidence, and you get stories about just how amazing this it that prince is.
- Most CEOs don't get a lot of chances as captain. It's like running for president, once you've lost your aura suffers. Someone did a study of this, I forget where.
- Since it's magic the cards are in the hands of the candidate who is chosen. They can really push up the price, and they need to before it wears off.
- Why has this happened more and more in recent decades? Generation of people who've grown up believing in magic. More TV news, more credit given to the boss, more people believe in magic.
- The boards-are-friends theory is not bad either, but boards have always been a bunch of business people who knew each other. More likely globalisation has provided a excuses for higher compensation: market is bigger and more complex, we're making more money.
- These are excuses, we can tell because how often does comp go up when perf is down? How often is perf relative to the index? How often is risk taken into account?
- Other things that don't make sense in the naive model of compensation: big business is like oil tankers, next quarter has already happened. Why would you pay a guy for the previous guy's performance? Why do you pay mega severance?
Another important point is that the top 350 US companies today are much larger than the top 350 US companies of 1989. To have an accurate comparison, the authors should have compared the compansation ratio of similarly sized firms, maybe the top 50 of 1989 to the 100th to 150th largest company of today.
it's a direct consequence of capital becoming top-heavy and inefficient. once all that money is sloshing around with nothing better to do, it gets hard to argue against giving just a little more to your friends in exchange for loyalty.
in a truly capitalistic economy, you'd expect capital to dissipate away from inefficiencies like that. that it doesn't is a serious signal of deficiency. in a fair labor market, you'd expect ratios to be much more equitable, as no one is 312X as efficient at value creation as another.
As AI and machines enables the same output with less work, if the men at the top fires the people that are subsequently "not needed" and put that money in their own pockets, we're on the way to a very bad place. Ideally, the extra income that AI and machines enable, would end up in everyone's pockets, and the extra free time as well.
I don't think the latter is what is happening though, hence the 312-to-1 ratio.
Abstract: This paper develops a simple equilibrium model of CEO pay. CEOs have different talents and are matched to firms in a competitive assignment model. In market equilibrium, a CEO’s pay depends on both the size of his firm, and the aggregate firm size. The model determines the level of CEO pay across firms and over time, offering a benchmark for calibratable corporate finance. We find a very small dispersion in CEO talent, which nonetheless justifies large pay differences. In recent decades at least, the size of large firms explains many of the patterns in CEO pay, across firms, over time, and between countries. In particular, in the baseline specification of the model’s parameters, the six-fold increase of U.S. CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large companies during that period.
I'm surprised the Guardian doesn't seem to raise this but the ever-increasing CEO pay packet I think is of less importance than this: real wages have essentially been flat for 40 years [1].
At the same time we have:
1. Corporations are paying less tax, largely due to tax avoidance schemes that mostly revolve around transfer pricing, particularly of so-called "IP";
2. Wealthy individuals pay less taxes. And here the tax rate they pay is a bit of a red herring. You see for most people they pay tax on their entire income. For the wealthiest individuals, they only pay taxes on what they (choose to) realize, which is significantly less than income. The counterargument is that this is simply deferring tax liabilities but if you can defer something essentially forever, it's basically the same thing as not paying it;
3. Zero interest rates mean that both wealthy individuals and companies can borrow money at little to no cost instead of realizing income or profits to gain disposable capital. You need $50m? Well, you can realize $100m and pay taxes on that or you can simply borrow $50m at 0.5% interest rate and not pay any taxes.
Here's an accounting change we need: borrowing money is treated as distributing a profit (for a company) or realizing income (for an individual).
So, back to CEO pay. Here's the problem: a lot of very mediocre CEOs earn astronomical pay packets because of justifications about "market rates", "large companies" and the like. Their impact is overstated due to outliers like Steve Jobs.
Here's a comparison. Steve Jobs earned roughly $2.1 billion from his comeback to Apple CEO [2]. Considering the transformation and the value returned to Apple shareholders, paying him 10x that would've been a bargain.
Compare that to... Sundar Pichai, who seems to earn ~$250m/year as Alphabet CEO... for what exactly? I mean what has Google done since 2015 (when Pichai become CEO) other than extract more from the ad golden goose?
Here's the problem: boards set CEO compensation. Who sits on boards? Other CEOs of course. How is that compensation determined? In part by what other CEOs earn. It's almost like the top 0.001% have been put in charge of setting their own compensation.
Wages of hourly manufacturing workers have been basically flat. Duh--those jobs are fewer and fewer. The good jobs are building the machines, not running them.
I’ve read hedge fund managers also tend to sit on such boards or otherwise actively “invest”. This can have interesting effects if they’re actively involved in multiple such groups.
That's about 6% annual growth. Hardly astounding at a time when worker wages have been stagnant, companies have seen big growth is average size, CEOs have become much more important and educated, oh and investors have seen vastly better outcomes.
IMO the reason is still stock-based compensation. Companies are run lean these days, and it's simply inefficient to reserve a pile of cash for paying people vs. using it for business purposes. Why do that when you can pay with stock? But at the same time you (as an exec) want to maintain control of the company. So you only give it to people who aren't going to just turn around and sell it on the public market. This excludes all of your low-level workers, who have bills to pay.
There are a bunch of business realities that get in the way if you want to pay a huge cash salary. For example, you may be a recently IPO-ed tech unicorn who doesn't actually make money, and the investors aren't too keen on the CEO paying themselves with their cash. But take all your comp in stock and all of a sudden you're a selfless hero aligned with business success.
Anyone with a pet theory that says this increase is inevitable because of cause $foo (or even that this situation this is justified because of reason $bar) needs to account for the fact that the equivalent ratio of compensation in the US military is around 8.
The US military of course has a budget many times that of most (any?) private companies, and it's generally agreed to be a better run institution than a lot of them.
The US military is a public institution and its purpose is not to make profit, how is this related to private companies and compensations based on private money?
[I assume you mean "for-profit" rather than "private". These companies aren't generally private and neither is their money, but...]
Exactly?!
People in this thread and elsewhere say this is inevitable because of "globalization" or "automation" or "increasing scale of operations" or "increasing concentration of authority" or similar things that apply equally to the US military.
The actual reason for this compensation disparity, which exists in large for-profit companies, and doesn't exist in one of the biggest organizations on earth, measured by budget, is capitalism and the market. The fact that the US military is not a for-profit company is the point.
If you view this disparity as a bad thing, then you have to accept that the corollary: you might, just maybe, have a problem with free market capitalism. Welcome to the club! :)
I don't see disparity of compensation an issue, especially if companies are enormous like these and for profit. The job of a CEO in a company with 20 employees is quite different than the job of a CEO in a company with 100000 employees. On the other hand, the job of those employees is often the same (especially for low pay jobs), this is why you see this discrepancy.
The only issue I see is when salaries are too low for the job, or when companies tries to prevent workers from unionizing.
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[ 3.6 ms ] story [ 184 ms ] threadhttps://www.npr.org/sections/money/2016/02/05/465747726/-682...
But your question is really inane. It's not about the individual choice to accept compensation, it's about a system for corporate advancement that creates such pressure for outsized wages at the top.
There's a real chance that the board has actively refused to allow increase in the lower level people's wages at the company.
It's not just that the guy at the top makes a lot extra, but also that the people at the middle and the bottom don't.
I have met almost no CEOs who were actually skilled AND were happy working for someone else. If you are worth $50m/year to the company, you are worth substantially more if you take that money and started your own company (the reason why most CEOs don't, and all the good ones do is because most CEOs are terrible).
Combine that with the rocketship of the market these past 20 years....
This was not compensation.
It was actually a good thing, it brought money in for NASA.
"Last year, McDonald’s boss Steve Easterbrook earned $21.7m while the McDonald’s workers earned a median wage of just $7,017 – a CEO to worker pay ratio of 3,101 to one. The average Walmart worker earned $19,177 in 2017 while CEO Doug McMillon took home $22.8m – a ratio of 1,188 to one."
Comparing ratios of yearly earnings between a CEO and part time workers can only be deliberate manipulation of numbers. This article is garbage designed to outrage and that's all it is.
As opposed to the garbage PG pulled out of his ass for his blog?
Also comparing CEO pay with hourly part time pay is completely on-point, as CEO's famously do very little work unless you count networking at the golf course as billable hours.
As someone here said just days ago 'Jesus Christ himself isn't worth 500x' I would add especially since the low wage hourly workers are almost always the ones making the actual money for the business.
My wager is that this has increased significantly more than 6x.
I know that California has very high sales tax and very high state-level income tax and those can add to federal income tax; but, federal income taxes aren't anywhere near 40% for people that make an average income.
https://www.bankrate.com/finance/taxes/tax-brackets.aspx
And each tax bracket is a tax on the money made above that (edit: tier), meaning $1 is taxed at 37% if they made $518,402.
New York's tax rates are here: http://www.tax-rates.org/new_york/income-tax
New York City's sales tax is 4.5% https://www1.nyc.gov/site/finance/taxes/business-nys-sales-t...
edit: wow. I'm being downvoted quite a bit here. What am I saying wrong? Where am I wrong? Clearly I must have some misunderstanding of how taxes work, can someone clarify it for me?
For $160,000 salary it gives 63.28% take home.
25.97% from taxes: 19.73 federal, 6.24 state.
Social Security: 5.34% Medicare: 1.45%
edit: scratch that, NYC is 63.28.
Americans tend to treat taxes and social security as separate, though. The tax percentage is 29.87% in NYC
Here is similar, but for some time now the government can transfer money between pots (e.g. spend social security money on something else), so essentially this is just cosmetic.
Setup a foundation, use that foundation to employ friends or relatives (like say, your wife). Pay out very little in charity but take your donations to the foundation as a tax write off. Etc.
This is harder than you think: https://en.wikipedia.org/wiki/Piercing_the_corporate_veil
>Declare those fees as a capital gain and pay 15% tax.
That's tricky. You can't just take money out of the corporation's coffers and say it was capital gains. You'd need to sell off your shares or something. Otherwise it's a dividend and is taxed as income.
>Or, have the corporation housed in a tax haven, pay almost nothing in taxes.
You still need to repatriate it back to your personal account somehow.
>Setup a foundation, use that foundation to employ friends or relatives (like say, your wife).
...which they're promptly taxed on. Actually you don't even need a foundation, you can just employ them at the corporation from earlier.
Mitt Romney is the inspiration for the management fees as capital gains trick. https://www.businessinsider.com/law-professor-says-one-of-ro...
The point of the foundation is you evade taxes with the writeoff. Using it to pay your friends/family is just a bonus.
It also helps to win you goodwill, you get to have galas etc. and convince people you're one of the good ones.
Nobody even knows what makes a good CEO
What's pertinent is whether increases in productivity are directly attributable to the workers in the denominator, or whether there are other reasons for that growth. Furthermore the denominator in that graph is not actually the total workers involved in the productive output of an economy... for example, the billions of workers added to the work force but who work in developing countries for slave wages aren't factored in to the denominator of total workers, but their output does contribute to the numerator.
1) Globalization has led to larger companies. The larger the company, the higher the pay you'd expect for the CEO (value of each decision is greater).
2) Technology has allowed margins to improve via cheaper cost to scale... economies of scale etc.
3) As another commenter noted, the impact of a CEO is relatively more than in the past, due to advancing technology. More social media presence, more effective means of communication across the company and so on, meaning their decisions are able to effect change more quickly.
4) Globalization has led to reduced wages at the bottom. Unskilled labor is paid less than ever due to that work being outsourced to China, Mexico etc. Some of the change may be more of a story of effective wages falling for the lowest worker.
5) Public CEOs are compensated mostly in stock, and interest rates continue to get lower and lower. Government has been much more aggressive with stimulus than in the past. This has juiced stock valuations.
I'd be interested in seeing how the gap has changed in "like-for-like" businesses. e.g. a 10 person construction company in 1989 vs today.
The CEO, though, is just one person and it's easy to pay a single person a lot of money.
In a company of 100,000 people, an extra $5,000,000 would only increase their salaries by 50 each; but, it could all go to the CEO and look gigantic.
CEOs are working in much more vague competitive environments.
- Sports is 11 people. Business is thousands.
- Sports people are literally recorded for every step they take. CEOs not so much.
- Attribution is whole different issue when you've got a years long strategy. By contrast in sports there's rarely a player left from the team of 10 years ago.
- Sports are made to be repeatable. Business evolves.
I'm just not buying your claim that sports stars can justify their extraordinary salaries while CEOs cannot.
No it isn't? You're comparing a literal where-was-Ronaldo-at-frame-768 with what the CEO does in his office all day. There's no way he's recorded in the same detail.
With sports you can say "this guy is the fastest, he will outrun everyone and that's useful". Or "this guy provided x assists". Or "this guy saved x number of shots". Players take shots many many times, so you can separate the good ones from the bad ones, due to high n.
There's no comparably clear measurement you can make on a CEO, because there aren't that many strategic decisions to make, and they aren't repeated. Once you've decided to buy that VR goggle startup, it won't be there anymore to tell you what would have happened otherwise. All you can have is a relatively small number of facts from which you can build a story.
> And attribution on sports success is also related to the other team members, the coach, the support given to the team, the infrastructure of the sport, the team doctors, etc. Sports teams definitely have years long strategies.
High number of observations and low number of team members in sports allows you to at least guess at replacement value. Eg LeBron really is better than the next guy, because we can see what happens when he's not there. And every game is comparable because it's set up that way. With business the landscape changes from the outcomes of the decisions, so it's pretty hard to figure out the counterfactuals.
Players do a lot of unrecorded influential moves, like team-building, mentoring, training, etc.
The game environment changes, too, as you're up against different teams, and teams evolve their strategy just like businesses do. The players change, the teams change, the strategies change, the other teams change, all on a constant basis.
Business is somewhere else on this scale.
But it was darn well worth it. The movie was a huge hit, and a big reason for that was Taylor's star power.
I'm sure they could have gotten an endless supply of starlets who would have done it for free, or even paid to play the role. But that wouldn't have been a good business decision for the producers.
For that matter, the larger the company, the more viable CEO replacements exist among middle and upper management.
https://press.princeton.edu/books/paperback/9780691120393/se...
I'm not sure who would be the general manager, how to replicate the functions of high school ball and the minor leagues, or how you could acquire the necessary data / stats... but I feel like there is some potential here!
He also pointed out there is a big "apples to oranges" problem even with the limited data available. In sports (but not business) you have lots of reliably tracked micro metrics in addition to final metrics (wins/revenue). The micro metrics are generated regularly (stats for each player for each game) and those metrics are portable across players (everyone is going for points, runs, blocks, whatever). In comparison, for CEOs you mainly have quarterly reporting of coarse financials (but nothing like employee morale, number of offices opened, etc.).
1.2 - Why?
2 - The New Deal's Capital's accommodation to Labor was to share the boon of increasing productivity (surplus). Neoliberalism (Reaganonmics) ended that foolishness.
3 - CEO compensation is merit based?
4.1 - aka Glut of labor.
4.2 - I'm curious what our future leaders will do to remedy today's glut of capital, the by product of decades of labor glut without the benefit of appropriate profit sharing.
https://zacharytoillion.medium.com/how-neoliberalism-destroy...
As in... science.
What we should do about it (if there is something we should do) is politics, an entirely different topic.
It's important to consider absolute quality of life in addition to inequality. "Equality" is a relative measure, but what matters in the end is how well each individual is doing.
I'm in favor of policies that would help the less fortunate, though we need to be careful to implement them in an effective way.
I do think manufacturing will shift from globalization to localization once enough of the process can be automated. Once shipping costs start to exceed production costs, manufacturing will move back home. Of course, if the manufacturing is automated, it means those jobs aren't coming back. This also depends on whether it's cheaper to ship the raw materials vs the finished product, and where those materials can be sourced from.
That being said, a lot of the recent rise in inequality has been driven by government policy. Some things like housing are becoming prohibitively expensive to most due to short term focused policy by the Fed and perhaps congress as well.
The policy reaction we've seen has been quite effective, but is creating many potential asset bubbles that can cause bigger problems down the line.
These bubbles obviously inflate the wealth of the rich and lead to much greater inequality (often described as the k shaped recovery).
Hyper targeted policy, and letting things reach equilibrium through mostly free market forces often produces healthier outcomes in the long run.
Overall, the CEO:worker pay ratio is a pretty meaningless statistic. At most companies, even if you were to entirely redistribute the CEO's salary to the employees, the employees still wouldn't see significant wage increases. For example, dividing Bob Iger's $47M salary amongst Disney's 155k employees would only result in a $300/year pay raise for each employee. People hoping to solve poverty by slashing CEO compensation are going to be sorely disappointed.
No one thinks bringing CEO pay back to Earth will solve poverty by itself.
There used to be a cycle. Companies would grow huge, eventually becoming overbureaucratized inefficient behemoths where personal competence is replaced by carefully designed corporate manuals. And in the next economic turn they would crash, opening the market to the next wave of lean founder-driven companies.
We broke this cycle in 2008 with bailouts and we are printing money ever since to keep the party going [0]. So yes, CEOs and shareholders now have considerably bigger leverage than workers. The companies are tactically inefficient (good luck getting a competent person anywhere), but strategically unbeatable due to scaling. Competing with them is practically impossible because offering services below cost is now a widely accepted practice, and if by some magic you managed, they will just buy you off. People who didn't get the foot in the door before 2008 are miserable and walking around with pitchforks looking for the next target. But thanks to what the media does, they only end up stabbing each other over made-up differences.
[0] https://tradingeconomics.com/united-states/money-supply-m0
The issue with high employee turnover is they are producing your product. As an investor, high employee turnover is almost always very bad. CEO turnover is usually totally fine (it depends, if a new CEO comes in and attempts to do anything bold...it is usually curtains).
If a single employee comes demanding a raise, they have 0 leverage over you. If you fire them, you will have 3659 employees for a day or two (until more candidates get hired) with your business designed to handle fluctuations between 3660 and 3750. It costs you zero, literally ZERO.
High turnover for low-wage jobs actually makes it better for the business. It's like if you already have a leaky basement with a sump pump in place, you won't even notice if you spill a single bucket of water there.
For a smaller business of 10 employees, replacing one could be harder. Sharing their workload over 9 people is harder. The owner will have to spend their own time searching for a replacement, remembering the things that the departed person knew and trying to teach them to the replacement, etc. That's why smaller companies treat people better.
As for the CEO, you can find people willing to do the job, but there's a big difference between willing and being able to. The main role of CEO besides giving a good public image is to keep the internal corruption and infighting at a level where it doesn't kill the company's business. Despite the fake smiles and positivity, it's a pretty dirty backstabbing environment and you need to know certain unwritten rules to play that game.
The corporations are handling it very well for their own bottom line: the people that could theoretically organize unions are now happily giving talks about privilege and forcing others to hate each other and compete for the artificially restricted pool of positions and zero-expense privileges (hello, pronouns), rather than coming together and refusing to do their work until everyone gets better terms.
Imagine if he took that 13 Billion Dollar single day income and spread it across every employee at Amazon. That would be a life changing amount of money for almost every warehouse worker. Roughly $22,500 each. And that's just one day for Bezos.
https://www.cnbc.com/2020/07/21/bezos-record-multibillion-do...
And even if you count stock fluctuations as income, he never earned it in one day, he earned it over 25 years of work.
If you give all of them 22k, a lot of them will use that money to jump ship. The value of Amazon will go down.
The value of a corporation is the _willingness of their staff to cooperate_. For low skill workers, higher pay can enable them to work their way up to higher skill jobs, which reduces their willingness to cooperate at the low wage job, which reduces the value of the cooperation.
I feel like I just earned a nobel price in economics, but I guess a real economist will quickly put holes in my epic bubble^^
Maybe I'm being disrespectful to these job, assuming that skilling up won't make them more productive and valuable.
not only could he not liquidate all of his holdings in under a few years without killing the stock price (and making the later sales worth less), but part of the value of amazon is bezos' oversight. if he dumps all his stock, the public elects a new board, which elects a new chairman, and they pick some new CEO, amazon wouldn't be worth as much as it is now.
(also he'd bleed away a chunk of whatever he sold off in capital gains taxes. his cost basis is presumably somewhere near $0, since he founded the company and has held from the start.)
It would also be around $17.5% of what he earned in 2020 alone.
The capital gains taxes would be offset by having a 13 billion dollar charity donation. Amazon Workers Fund.
of course paying someone more doesn't make them more valuable, in the same way paying extra for lunch doesn't make it a better lunch.
rather, they're valuable to you, so you pay them more. in the same way that lunch at the high end restaurant costs more.
perhaps the best CEOs, with their wealth of connections, aren't worth the additional cost. (like an overpriced restaurant.) interestingly, that's an investable thesis! you could go invest in companies with the cheapest CEOs. i look forward to hearing about your returns!
Also, your view is based on one of the great lies that CEOs tell shareholders. CEOs do better when they are fully invested, and (the argument goes) big pay aligns incentives. It doesn't. Most CEOs cash out their options, buy a McMansion, and waste all their money. If you want to do well: you buy businesses that don't rely on CEO skill (if you rely on a skilled CEO, you are done for...you aren't getting one), and you align incentives (i.e. no option cashing, the CEO has 99% of their wealth invested permanently).
No one actually believes that. The problem is that if you don't pay a capable CEO 10x more, they are gonna leave elsewhere where they can get paid 10x more. And the only people to replace them who wouldn't be asking for the same amount of compensation are not the kind of people you would want to be your CEO.
As others have said, CEOs aren't a commodity, just like top tier athletes and actors aren't. LeBron gets paid multiples of what his teammates make [0]. Most of his teammates on LA Lakers earn single digit low millions (with the average being even lower), while he made $39mil from his contract last year. Is he providing 10 times the value to the game that his teammates making under $3mil/yr do? I doubt it. But if you want LeBron, you gotta pay it up, because there isn't a lack of other teams out there who would be more than happy to pay him as much.
0. https://www.basketball-reference.com/contracts/LAL.html
And CEOs are not like top tier athletes. The comparison is ludicrous because most CEOs are paid like Lebron but have the skill of his teammates. The number of actually good CEOs is far smaller than the number of CEOs...as in, there is usually one proven value creator per 10,000 CEOs.
Btw, my sample isn't small. I worked in equity research, I can only think of one CEO I have personally come across who was actually good. One out of thousands (I say personally, there are probably ~5 that I have come across outside of my circle). Your average CEO is not just bad, they are usually actively harmful (because they tend to view becoming CEO as an achievement, they tend to apply few standards of common sense to their decision-making, the way Boards incentivize behaviour also makes no sense).
The reason why this happens is two-fold: there is a culture of "the CEO", and most Boards are full of people who were also CEOs and believe they were very special. It is possible to prove this behaviour is irrational quite easily: how many CEOs have done nothing but fail, and still get hired? Lots.
It is out of this world, irrational behaviour.
I agree with you on this. However, do you expect the CEOs who are willing to take a comp that is x10 less to be just as good? Something tells me they won't be.
Like, sure, an average software dev even at a highly paid place like Google is "decent", not "great" (like LeBron would be in this analogy). However, do you think that Google would be willing to just switch to hiring all those other "mediocre" devs from Infosys or Tata for $40-50k/yr? After all, Google's own engineers are just "good enough" on average, and that would be a massive money saver. And yet they don't do it, and neither do their competitors.
That was the whole premise of the big H1B visa controversy, with most applicants from more "legitimate" tech companies and outside of that being pissed off that they have to participate in the visa lottery due to most of the visa cap each year taken by Tata and Infosys employees who each get paid much less (which, in turn, makes the justification for H1B visa for them much shakier).
It's how mediocre CEOs like Marissa Mayer was able to get over $200 million in compensation, even though her background, while impressive, didn't warrant it. Yahoo shareholders ate that up. Take a look at someone like Shaquille O'Neal, who was able to command a 20 million dollar contract in 2009 even when he was at the end of his career and past his prime. He was marketing gold for his team.
The average size of companies in the US has increased dramatically and there has always been a very strong correlation between CEO compensation and the size of the company they lead. By ignoring this obvious confounding variable, the article undermines - maybe deliberately - the reader's ability to interpret the data. But then I believe the author's purpose is to generate heat/outrage rather than light.
I mean it seems to me that an obvious question raised by this trend is why are companies getting bigger on average? And why are companies bigger in developed economies than developing ones[1]?
Is there a natural limit to this growth in average company size? Or are we heading towards the entire economy being dominated by a few super-massive corporations?
[1] https://markus-poschke.research.mcgill.ca/papers/mposchke_sk...
And that’s ignoring the problem that messes are inevitable, because programs must eventually deal with the real world, and the real world is a shitshow. Changing requirements, abominable external interfaces, business logic generally, etc.
The main draw for unnecessarily messy codebase however is putting novices in charge, but you don’t need to overpay to avoid this (and you don’t really need the best of the best) — you need better selection practices, and I’m not sure anyone’s ever found a good way to select new resources (hiring interviews have at best a very spotty record, and a very shallow filter)
For a big tech company, it is thus faster for them to just grow the number of teams and engineers, and give them each smaller and smaller chunk of an overall more and more complicated set. Basically, it's like throwing money at the problem, but it works.
You bootstrap some new product, program or feature quickly, the effort could be led by a single or a handful of A+ engineer and some PMs. And then you create a whole team to forever maintain it composed mostly of junior and mid with high attrition rates.
There isn't really much to squeeze out by firing employees.
- To make it to the top, you need an aura around your persona. How often do you see an anointed one or two, among thousands? It's corporate religion essentially, the politics reduces the field unnecessarily to the level where there's just a handful of crown princes.
- Similar to sports, people try to split hairs about who is good enough and who isn't. Nobody's ever heard of randomness and serendipity. Add to that a total lack of controllable evidence, and you get stories about just how amazing this it that prince is.
- Most CEOs don't get a lot of chances as captain. It's like running for president, once you've lost your aura suffers. Someone did a study of this, I forget where.
- Since it's magic the cards are in the hands of the candidate who is chosen. They can really push up the price, and they need to before it wears off.
- Why has this happened more and more in recent decades? Generation of people who've grown up believing in magic. More TV news, more credit given to the boss, more people believe in magic.
- The boards-are-friends theory is not bad either, but boards have always been a bunch of business people who knew each other. More likely globalisation has provided a excuses for higher compensation: market is bigger and more complex, we're making more money.
- These are excuses, we can tell because how often does comp go up when perf is down? How often is perf relative to the index? How often is risk taken into account?
- Other things that don't make sense in the naive model of compensation: big business is like oil tankers, next quarter has already happened. Why would you pay a guy for the previous guy's performance? Why do you pay mega severance?
in a truly capitalistic economy, you'd expect capital to dissipate away from inefficiencies like that. that it doesn't is a serious signal of deficiency. in a fair labor market, you'd expect ratios to be much more equitable, as no one is 312X as efficient at value creation as another.
I don't think the latter is what is happening though, hence the 312-to-1 ratio.
Abstract: This paper develops a simple equilibrium model of CEO pay. CEOs have different talents and are matched to firms in a competitive assignment model. In market equilibrium, a CEO’s pay depends on both the size of his firm, and the aggregate firm size. The model determines the level of CEO pay across firms and over time, offering a benchmark for calibratable corporate finance. We find a very small dispersion in CEO talent, which nonetheless justifies large pay differences. In recent decades at least, the size of large firms explains many of the patterns in CEO pay, across firms, over time, and between countries. In particular, in the baseline specification of the model’s parameters, the six-fold increase of U.S. CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large companies during that period.
At the same time we have:
1. Corporations are paying less tax, largely due to tax avoidance schemes that mostly revolve around transfer pricing, particularly of so-called "IP";
2. Wealthy individuals pay less taxes. And here the tax rate they pay is a bit of a red herring. You see for most people they pay tax on their entire income. For the wealthiest individuals, they only pay taxes on what they (choose to) realize, which is significantly less than income. The counterargument is that this is simply deferring tax liabilities but if you can defer something essentially forever, it's basically the same thing as not paying it;
3. Zero interest rates mean that both wealthy individuals and companies can borrow money at little to no cost instead of realizing income or profits to gain disposable capital. You need $50m? Well, you can realize $100m and pay taxes on that or you can simply borrow $50m at 0.5% interest rate and not pay any taxes.
Here's an accounting change we need: borrowing money is treated as distributing a profit (for a company) or realizing income (for an individual).
So, back to CEO pay. Here's the problem: a lot of very mediocre CEOs earn astronomical pay packets because of justifications about "market rates", "large companies" and the like. Their impact is overstated due to outliers like Steve Jobs.
Here's a comparison. Steve Jobs earned roughly $2.1 billion from his comeback to Apple CEO [2]. Considering the transformation and the value returned to Apple shareholders, paying him 10x that would've been a bargain.
Compare that to... Sundar Pichai, who seems to earn ~$250m/year as Alphabet CEO... for what exactly? I mean what has Google done since 2015 (when Pichai become CEO) other than extract more from the ad golden goose?
Here's the problem: boards set CEO compensation. Who sits on boards? Other CEOs of course. How is that compensation determined? In part by what other CEOs earn. It's almost like the top 0.001% have been put in charge of setting their own compensation.
[1]: https://fas.org/sgp/crs/misc/R45090.pdf
[2]: https://www.cheatsheet.com/entertainment/what-was-steve-jobs...
There are a bunch of business realities that get in the way if you want to pay a huge cash salary. For example, you may be a recently IPO-ed tech unicorn who doesn't actually make money, and the investors aren't too keen on the CEO paying themselves with their cash. But take all your comp in stock and all of a sudden you're a selfless hero aligned with business success.
The US military of course has a budget many times that of most (any?) private companies, and it's generally agreed to be a better run institution than a lot of them.
Exactly?!
People in this thread and elsewhere say this is inevitable because of "globalization" or "automation" or "increasing scale of operations" or "increasing concentration of authority" or similar things that apply equally to the US military.
The actual reason for this compensation disparity, which exists in large for-profit companies, and doesn't exist in one of the biggest organizations on earth, measured by budget, is capitalism and the market. The fact that the US military is not a for-profit company is the point.
If you view this disparity as a bad thing, then you have to accept that the corollary: you might, just maybe, have a problem with free market capitalism. Welcome to the club! :)
The only issue I see is when salaries are too low for the job, or when companies tries to prevent workers from unionizing.