It's interesting that the cause for spiraling CEOs salary is similar to the cause of spiraling Civil Service salaries over the past 30 years. In both cases compensation is not based on performance but rather on what others in similar positions are receiving and control of the compensation process.
In corporations there will be board compensation committees that hire outside compensation consultants. The consultants will come back with a suggested salary that is the current standard for similar companies plus an additional amount to insure that they "get the best". There are only a small group of such consulting companies and it is in their self interest to inflate executive salaries. Suggesting lower salaries would mean a loss of future business because it is the very same executives that hire them.
For civil service contracts their will be independent government boards set up to negotiate salaries. To insure that the boards are independent they are usually constituted using a political process. As a baseline for salaries they will use formulas based on what other unions make plus a little something extra because "well everyone deserves a raise". As with the executive compensation committee, it is in the self interest of the government compensation boards to be generous. The government boards are appointed positions based on the party in power. Given the capabilities of unions in voter organization, it is fair to say that they at least indirectly hire the compensation board members.
The net result in both cases is spiraling salaries that have no relation to performance.
Except that civil service salaries haven't been spiraling at all. Since 1969 they've gone up 428%, yet the consumer price index has risen 477%. See http://assets.opencrs.com/rpts/94-971_20100120.pdf .
The public payroll information for my state is available through the website http://seethroughny.net/. For 2010 there were over 116,000 public employees who made $100k.
A lot of those 116,000 public employees will be managers, or skilled professionals (engineers? doctors? no idea). A public service manager working a 60 hour week would probably make a similar amount in the private sector, and no, they don't have easier jobs. Their jobs are often kind of meaningless (dealing with lots of politics and bureaucracy), but that doesn't make them easy.
If it's anything like Australia, it's low-level public servants who have the best pay. They typically have very little responsibility, great conditions (public execs have unlimited work hours, but non-execs have fixed hours) and no-one competes for their job because it's hard to get your foot in the door.
OK, looking at the data, there's a lot of "stationary engineers" and "sewage treatment workers" on high pay points. No idea why. Maybe they have a very strong union, or it could be a data error. Or maybe it includes some kind of payout, after a bunch of "stationary engineers" were injured?
In the suburban county where I live 94% of police officers made more than $100k in 2010. The average police officer made $132k. There were 2,499 officers.
You will probably not be surprised to learn that your community is atypical, to say the least. The national average is more like $50K, and there are many places where the officers are paid way below the average.
The base salary for a police officer in this area with five years experience is $108,000. That does not include additional benefit costs such as pension (after 20 years) and complete health care coverage. Throw in higher ranking officers and overtime and you get the figure mentioned previously.
I'm not sure what your point is. Would it bother you less if they were all contractors? You live in New York, the 3rd most populous state in the country, so it follows that you would have a lot of civil servants compared to say, Alaska. Nothing in your statement provides any evidence that civil service salaries are rising beyond inflation.
The right likes to scream about this phenomenon in civil service. The left likes to scream about it in the private sector.
Incredibly good point... it's the same phenomenon.
We need -- collectively -- in all spheres -- to take a good look at some people and start asking questions like "what exactly is it that you do here? what value do you create that is commensurate with your salary?"
In government this has to happen at the management or political level. In the private sector this needs to happen via shareholder pressure. If shareholders had a brain, they would start agitating for long-term merit-based CEO pay.
Ah, but not all shareholders are in it for long-term gain, so they don't necessarily want a CEO that aims for the long-term. And even those that are technically in it for the long-term are hand their money off to Fund Managers, who as recent times have shown aren't that great at long-term investment either.
I think you need to be a lot more specific in what you're talking about with regard to civil service salaries.
I've actually been on municipal boards negotiating with unions and the salaries definitely were not going up more than inflation. But the amount we were spending on employees was in fact skyrocketing.
You know why? Health insurance. Any study showing you one number and omitting the fact that none of that increase actually goes into employees' pockets is lying to you.
Add non-profits to this list. The same mechanisms are in place, and executive compensation in non-profits is routinely compared to that in "a company of similar size".
Paying CEOs for 'performance' may not be a significant improvement unfortunately.
Daniel Kahneman, and Nassim Taleb have spoken about this - essentially that there's no good reason to think CEOs of large companys have any significant control over their company's outcomes. Our judgement is clouded by a combination of hindsight and narrative biases along with a significant underestimation of 'luck'. Kahneman quotes something like a .6 correlation IIRC. So, it CEO performance exists, it's just overestimated.
Kahneman's new book - Thinking Fast and Slow - is an excellent read.
I really don't understand why people think any amount of pay over, say, a few million, for any position, makes any difference to anyone.
Think about the people you know who are good at their job. Do they give a fuck about money if you give them enough that they're taken care of? No, they probably care a lot more about prestige, interesting problems, other ego-feeders besides a silly 8-digit number.
Of course, CEOs are bound to be good negotiators and will negotiate themselves a higher number because why not. But is anyone going to argue that there's a serious quality of life difference between 20 and 100 million?
Because I want to have enough money to say hey, people should go to Mars and so I'll start a company that does that. I want to pursue social, medical research, and technological policy on my own terms which needs my own capital.
Because I want that apartment on One Central Park that costs $17 million and I want a chauffeur at 50k a year and a PA at 100k a year and someone to take care of my kids for 100k a year (no sketchies). I also want to be able to hire a plane when I want to do I can zoom out to Tripoli or Nigeria when interesting things happen and no private charter will go.
Maybe I'm being the stereotypical New Yorker, but I can see 30, 50, even 100 million dollars whisking away rather fast. You know what traders call $100 million of personal income? A unit. It's the starting point.
Note: CEO pay is not, when done sensibly, where the Board goes "Mark, you look damn handsome today - here is a hundred million. Go wild." It is a structured pay where you try and align incentives, that is, give the CEO upside when he does well and some downside when he doesn't. You want to encourage sensible risk-taking, remove principal-agent issues, and deal with moral hazard. Most pay for CEOs comes in stock grants or via other non-cash instruments. It is also usually not guaranteed up front.
It's a broad metaphor for companies giving executives incentives to earn income that comports with the value they produced for shareholders. The incentives drive these executives far beyond where it has material significance for them because there are things beyond the material which money can increase the probability of attaining and that many people aspire towards.
Please keep your comments civil/constructive. Calling someone a douche because you disagree with their materialism does not add to the discussion, and is frowned on here.
It wasn't total hyperbole. I don't think it's fair to demonise one person's vanities over another on the basis of personal preference.
My vanity is technology. I also place a premium on having a living space that is aesthetically pleasing. A colleague of mine gets a similar aesthetic thrill from beautiful clothes. I tend to judge people whose vanities are primarily outward facing, e.g. buying an expensive car not because you appreciate the craftmanship but because you want to look snappy in it, but that's for the potential insecurity it alludes to rather than the indulgence itself.
A $17 million purchase is proportionally peanuts to some people. What you and I may call peanuts is a lifetime of difference to someone in the third world. Classifying materialism on such a high level seems absurd.
The point I had was things can be bought for their inherent aesthetic value, independent of status signalling. Status signalling, while a deeply rooted biological behaviour, is a primitive imitation of the former.
Also, there is a correlation between pay and performance. You can't just strike out the empirical record for rhetorical convenience. It's closer tied to portion of pay in low-struck options, etc. versus cash pay but statistically significant nonetheless.
Paying $10 million for artwork and never looking at it makes a person a douche. The person is paying eight figures to deprive someone else of having it-- nothing more. It's not "supporting the arts". It's being a hypercompetitive shitfuck.
Paying $50 million for trophy real estate instead of investing it into better transportation (the only long-term solution to the real estate problem in New York and Silicon Valley) makes a person a douche.
Using a private 747 for casual transportation, logging an unconscionable ecological footprint through the unnecessary combustion of hydrocarbons in enormous amounts, makes one a douche.
Developing a tight social network to keep global society exclusive, closed and impoverished is a douche move.
Corrupting the U.S. political system and getting the world's most powerful nation into an unwinnable War of Corporate Enrichment (Iraq) is a douche move.
Morally speaking, the tip-top upper classes of the U.S. owe their lives to us in the cognitive 1 percent. They are deep in moral debt to us, and what keeps us from collecting is that we have more interesting things to do (in technology, where we can make positive-sum contributions to the world). We have the persuasive capability and the technological know-how to rise up and take them out, Paris 1793 style. We don't, because for enough of us, life remains pretty good. We're not "among them", and they constantly remind us of this fact; but we can work in technology, live pretty well, and generally control our own destinies. If that ever changes, though, those people need to watch the fuck out.
Like almost every software engineer, I get paid far less than a few million dollars. And like almost every software engineer (the bachelors, anyway) I get paid far more than I "need". But according to many HN articles, if I were to accept a job without negotiating my pay upward as much as is reasonable, I would be a sucker.
TBH, if I heard a CEO of a for-profit didn't try to get a higher pay package, I'd be wondering about this CEO's business skill.
Of course he's gonna negotiate upwards. Someone good at the job of CEO would do so instinctively, because negotiating is a big part of their job and they like to do it well.
But it's not what his performance or his quality of life is based on.
The fault isn't being placed on the CEO. He is an individual who seeks personal gain primarily, places family interest and other similar motivators ahead of the needs of the organization he leads.
Rather, fingers should be pointed at Boards who agree to ridiculous compensation packages.
Most economists say that every good is non-satiable, except money, which people only want for the purpose of consuming goods.
In reality, the reverse is often true. You can have too much pizza (though it can be fun to try). You can't have too much in your bank account (or investment portfolio).
True, you can't have too much, but you can have enough that it puts you well past the point of diminishing returns.
If I, for example, were making 1m a year as a software engineer but still had to answer to someone else and deal with bullshit (read anything I didn't want to deal with - politics, TPS reports, writing boring software, limits on vacation), I'd still be as unhappy as I would be at twice the pay. More money wouldn't make the situation any more palatable. Getting a position that lessened the bullshit would. That position could take several forms, and there's many different levers (e.g. paid vacation, a position of substantial autonomy) I can pull besides money to increase my satisfaction.
I can't imagine, though, that most CEO's can move those levers drastically. It's not like you can negotiate for a more reasonable board come hiring time. CEO's don't take vacation in the same way you and I do, and even if they did, I'm not sure a CEO who fought to take time away from his company would be thought of favorably.
But you can't have the best pizza in the world without potentially spending thousands of dollars to get yourself to Naples.
That's an extreme example, but I assume those economists mean that almost any category of good can reach arbitrary levels of consumption. If I had several billion dollars, my pizza acquisition budget might literally be 1000x what it is now.
Maybe, but I doubt it. And a holiday to Naples is not pizza, it's a holiday to Naples. In virtually every respect worth speaking of, they are entirely different products.
But is anyone going to argue that there's a serious quality of life difference between 20 and 100 million?
You're only looking at it from the executive's POV, not the company's. They are looking for the best they can find. It may be worth it to them to pay, $X million more for somebody who scores a 99 on a hypothetical CEO test, compared to somebody who scores only 98. The company wants to get somebody better, and to get that higher quality, they've got to fork over additional compensation.
Of course, companies are frequently wrong in the way that they score their candidates. But that doesn't change the fact that they've bidding on the highest perceived quality.
Anybody who doesn't want the job enough to do it for 10 million but would do it for 100 million is going to SUCK at the job
I think you're assuming to much in this statement. It's not clear that they would not be willing to do the job for $10 million. But there are 100 different companies who would be willing to pay them that much, and they've got to make a decision somehow. Other things being equal, they'll go with the one that offers the most.
This is exactly what pricing does in a market. It allows the participants to signal the importance of a product to them. That $100million bidder is signalling that it's more important to him to get mister AAA CEO. Is there some reason that we should ignore that bidder's signal?
You're arguing that the highest paid people in the world operate at the bottom of Maslow's hierarchy of needs.
Was Steve Jobs a $1/year CEO? How about Sergey Brin?
Good leaders typically have different motivations than "I could afford to upgrade my yacht from 10 million to 25 million". I understand that that complicates your economic model, but guess what, it's people we're talking about here.
Michael Lewis points out in one of his books that for people on Wall Street, income is just a way of keeping score - which implies that money still is an incentive, just that the reasons change.
This actually implies that they don't really care about the money, only about the relative 'score'. Which means that they would not be disincentivized by heavy taxes, since their before-tax score is what matters to them.
Past a few million, wealth has basically no correlation with consumption. So to the extent that economic inequality is about unequal access to consumer goods (vs unequal numbers in a brokerage account), those high incomes are not a factor.
But they have an important indirect impact: wealth correlates with power; if you're richer, you can control more businesses, and run them the way you'd like. Thus, high marginal income taxes keep the old guard in power longer, and mean that ambitious people with new ideas take longer to take control.
High income taxes and capital gains taxes will mean that proportionately more of the world's companies will be owned and run by Rockefellers and du Ponts rather than Zuckerbergs.
I can't address the part about my assertions being unfounded, but you can replace "high marginal tax rates" with "lower levels of executive compensation" without affecting the argument.
So, what false assertion did I make?
It's interesting to read the first Forbes 400 list; there's a lot of old money there. Not so much lately.
Zero correlation is a surprising number. That seems to imply that CEOs are paid fairly; I had thought they were overpaid.
If they're underpaid, there should be a positive correlation between CEO pay and corporate performance (i.e. the companies that pay the most can hire the best people). If they're overpaid, there should be an inverse correlation (i.e. the companies that pay the most are likely to overpay the most, and thus waste the most money). So the exact middle ground implies--the exact middle ground. I didn't realize the market was so efficient.
The other possibility is that CEO pay or market performance are totally random. But all you need to do is identify a few very effective and very well-paid CEOs to argue that this is false. Just look at e.g. JCP's new CEO (they nabbed him from Apple thanks to, in part, a generous options package).
This might be clearer in another context: it wouldn't surprise me to find out that your average hunger in a given day has no correlation to your daily caloric intake. That wouldn't imply that calories don't satiate hunger; it would imply that most of us eat something close to our daily calorie requirement.
> all you need to do is identify a few very effective and very well-paid CEOs to argue that this is false
No. If there's no correlation between CEO-pay and performance/market cap, finding a few interesting counter-cases doesn't further your argument. Inherent randomness and lack of accounting for other factors are far more likely to be the culprits here than market efficiency.
EDIT: Further, zero correlation isn't a "middle-ground" between positive and negative correlation. If it implies anything it's that one variable (performance/market cap) doesn't depend on another. If there's no correlation, CEOs can still be overpaid, they just can't do worse for their companies as pay increases.
1. There's an efficient market, and CEO pay reflects the extra value they create. In other words, a $100 million CEO is worth $50 million more than a $50 million CEO, so your economic outcome is the same regardless of which one you hire--except that larger companies will extract more value out of a given level of managerial talent, since they can amortize it over more underlings/revenue/whatever.
or
2. CEO pay and company performance are totally random. But for that to be the case, you'd have to deny that there's any such thing as being able to identify and pay for a talented CEO. Maybe! But every time I've interacted with large company CEOs, I've noticed that they tend to be very bright, and they work extremely hard. People who are in the 10th percentile of public company CEOs--the kinds of people who bankrupt companies--still seem to be in about the 90th percentile of smarts and energy.
I don't know of another theory that could explain the data as presented. Either the process is random, or it selects for people with certain valuable skills. If the system tends to promote skilled people, you'd expect the companies they run to have a higher return. Unless, of course, they capture that value for themselves.
[CEOs] tend to be very bright, and they work extremely hard.
You can be extremely bright and work extremely hard and yet fail to produce a desired outcome due to forces beyond your control or understanding. It's human nature to overestimate our degree of control over events, and indeed, CEOs are probably selected for this trait more than other professions. Who wants a CEO who admits he really doesn't have much influence over the fate of a $100B enterprise? No, you want someone who is self-confident to the point of delusion.
I'm not sure if this is deliberately obtuse, but: all else being equal, the smarter and harder-working person will win, right? The existence of some randomness doesn't mean that skill and judgement are immaterial--if you disagree with that, let's play poker some time.
[A]ll else being equal, the smarter and harder-working person will win, right?
But in actuality, all else is never equal. Then we use the outcome of that unequal scenario to judge after the fact who was the smarter and harder-working. In poker you have a very regular, controlled game. Imagine a tournament where some players were randomly given extra aces, then try and figure out who the best players really are. That's the corporate CEO market.
> $100 million CEO is worth $50 million more than a $50 million CEO, so your economic outcome is the same regardless of which one you hire
What you're suggesting here is not that there's no correlation, but that there is a latent correlation hidden by the market. Another scenario is that some CEOs do well for their companies and some do poorly and this doesn't depend on how well they're paid. In other words, I'd vote for possibility 2, except instead of saying CEO pay and company performance are totally random, I'd say they're independent of each other.
Pay is not the independent variable here. I'm not arguing that if you double someone's pay, you'll double their performance. I'm saying that if there's zero correlation between pay and performance, and that pay to some extent predicts pre-pay performance, then one is forced to argue that well-paid CEOs are superior to poorly-paid CEOs, on average, but that they capture the benefit they create.
And that's not hard to believe. If someone had just a 10% chance of running Exxon 1% more profitably, their market value would be $40 million per year.
This seems unlikely. JCP's CEO apparently gets ~.5%-1% of JCP's profits (i.e. ~.01-.02% of revenues, dependent on performance). 0.01% of revenues is not enough that a company will actually feel the CEO's salary, but it seems very likely that a marginally better CEO can raise profits by 0.01% of revenues (which would allow a doubled base salary!)
More likely explanations: various inefficiencies interfere with getting the best, (good) CEOs are not easily attracted by even larger salaries, companies in dire straits need to pay for the damage they're likely to do to a CEO's resume, the study is simply too small. (Teasing out a 0.01% effect is hard!)
Even for very highly paid CEOs, you wouldn't expect their remuneration to be much more than a single percent of revenues, and so underperformance as a direct result of overpaying the CEO is unlikely to be an issue for any big company.
Statistically, the direct effect of CEO pay on the bottom line is dwarfed by the indirect effect of his/her work on the bottom line, making it hard if not impossible to isolate, and so I don't think these numbers quite tell the story you think they do.
The headline is probably true in the statistical sense. The sample size is undoubtedly small and economic data are often tainted by the efficiency effect--the 'experiment' is uncontrolled and actors might already be choosing the results that are best for them, dramatically reducing the apparent statistical effects of their decisions. Finally, CEO pay is often negotiated before performance becomes apparent, and for something like CEO I'd imagine it's really hard to tell how well they'll do in advance, even if you're trying to pick the best people for the job. It's not like there's a CEO aptitude test, it's not like the skills picked up being CEO of Pepsi are necessarily transferable to being CEO of Apple Computer (for example).
The headline might also be true in the economic sense. I'm not especially qualified to judge this.
The article, however, is quoting the apparently private data of one obscure financial research firm. So I'm filing it under Not News.
(I also just noticed that they call Warren Buffet 'underpaid'. The guy earned fifty billion dollars being CEO of Berkshire Hathaway. Calling him 'underpaid' seems like a bit of a technicality.)
I think the point is the board should structure pay so that when the company does well the CEO automatically earns more and when it doesn't he doesn't.
CEO pay is frequently structured like this already. CEOs will often get half or more of their pay in restricted stock and options, and it's not unheard of for their salary to be a token value like $100 or $1. They also have the incentive of not being fired, and being re-signed if they're on contract.
The alleged problem is that the vesting/restriction periods for these stock and options is too short, like a few years. I have a pet idea that CEO pay should be mostly in stock that vests quickly but is restricted for a very long mean time, like 20 years. But that's just a pet idea and I bet it would be a very hard sell to potential CEOs.
I also think pay for performance is overrated. It won't help if you have the wrong guy in the first place.
You are forgetting that this compensation is then discounted for time. And 20 years would incur a very substantial discount. Every CEO knows how to do that math.
Radically increasing the vesting time means that you would need to grant several times the number of options that you would need to grant for shorter vesting terms, just to maintain parity. The potential dilutive effect for other shareholders (including employees) would be rather large.
I also think pay for performance is overrated. It won't help if you have the wrong guy in the first place.
True, but with pay-for-performance hiring the wrong guy means you paid less (since he didn't perform).
Further, I don't know of a viable alternative. Don't pay for performance? Now you're dealing with a problem of adverse selection - you're more likely to land with a lemon.
The chief problem with CEO pay is that it exhibits much optionality without compensation to the shareholders for that - if the CEO does well he experiences a gain, if he doesn't, he just gets fired (unless the failure is fraudulent or very public).
There is an interesting podcast with Steven Kaplan about the same issue. His research showed a similar result: CEOs are paid fairly and have had wage growth similar to other highly skilled fields (doctors, lawyers, etc).
Conversely, he found that hedge fund managers have absolutely skyrocketed past everyone else. They have totally blown past any type of normal wage growth and are the real culprit for the "1%" phenomenon.
This makes me think back to the TED talk that discusses that higher pay actually decreased performance and employee motivation when innovation is required.
Interesting that the overpaid industries are those that i would consider to be less innovative and those that are considered underpaid are the move innovative industries and companies. That is just my opinion however.
I wonder if they would find a correlation between board members not getting voted out and CEO pay. Maybe shareholders tend to be pleased if boards hire big name CEO's?
Many companies have what basically amounts to a board exchange where a high-ranking official from company A serves on the board of company B which has an official on company C's board and company C has an official on company A's board. In the end, it has the potential to be an "I'll scratch your back, you scratch mine" arrangement.
Yes, it's hindsight because you're reading the conclusions of a study and saying "I could have guessed that." But you didn't know that, you suspected it. The point of doing such studies is to know. I also suspect, but obviously can't demonstrate, that someone would have said the same thing ("I could have told you that") were the conclusion the opposite.
It's actually a steep negative correlation if you take a historical context. In the 1970s, CEO pay was much lower and companies were well run. Now, CEO pay is very high and the results are awful. I explained this "paradox" in a blog post a year and a half ago:
"In the 1970s, CEO pay was much lower and companies were well run. Now, CEO pay is very high and the results are awful."<citation needed>
How can you possibly make the assumption that companies are run worse today than 70's? What quantitative measurements show this 'steep negative correlation'?
They also wore more hats. Or the market was different, or they weren't dealing with labor shortages, or their predecessors set the stage differently, or inflation has increased 580% since 1970....
It's not possible to tease out the cause and effect.
Fortunately there is an easier way to figure it out; if the businesses are hiring idiots, at far to much money the easy way to tell they are doing it is their stock price will plummet and they will go out of business.
A really significant difference that I rarely see acknowledged in these discussions is that the means of compensation has changed drastically in the last few decades.
It used to be that executives got part of their compensation through perks like generous expense accounts, or country club memberships, or keys to the executive washroom. Changes in tax laws and other cultural norms have eliminated these as such. But the corporations still need to be able to compete for the same pool of executives, and so the money that had been going into those perks now surfaces as monetary compensation.
In other words, much of the apparent increase in salaries is actually just that part of the old-days compensation wasn't reflected as income.
wow dude, that's quite cynical, and subjective at best. Go look one of these "parasites" in the eye and tell him that you think he's a "psychopathic narcissists ... influence-peddling assholes" and that he's not "selfless, enlightened, pragmatic".
TLDR: if there was any weight to your thesis (which is, what, exactly?), you totally discredited yourself with your cynicism.
In corporations there will be board compensation committees that hire outside compensation consultants. The consultants will come back with a suggested salary that is the current standard for similar companies plus an additional amount to insure that they "get the best". There are only a small group of such consulting companies and it is in their self interest to inflate executive salaries. Suggesting lower salaries would mean a loss of future business because it is the very same executives that hire them.
For civil service contracts their will be independent government boards set up to negotiate salaries. To insure that the boards are independent they are usually constituted using a political process. As a baseline for salaries they will use formulas based on what other unions make plus a little something extra because "well everyone deserves a raise". As with the executive compensation committee, it is in the self interest of the government compensation boards to be generous. The government boards are appointed positions based on the party in power. Given the capabilities of unions in voter organization, it is fair to say that they at least indirectly hire the compensation board members.
The net result in both cases is spiraling salaries that have no relation to performance.