The era of distrust and disloyalty
gerrymcgovern.com
gerrymcgovern.com
Modern capitalism rewards those who can capture value over the those who create value. It's not about the product or service; the scales are tipped in favor of those who have access to the money (essentially; those who have access to the customers).
That's why marketing is such a powerful force in our society. People tend to trust marketing more than they trust their own senses... A lot of popular brands offer horrible quality products - Particularly in the food industry, but that doesn't stop people from consuming them to great excess.
Yup, pretty much. Turns out Piketty (and before him, Marx) are right.
Of course, since democracy depends on marketing, politicians have done a great job marketing a political system that doesn't work for the common person, yet they still vote for it. As long as they have a shiny toy in their hands, and something to entertain (distract) them, the masses are placated...
Not seeing that yet but it can't come soon enough.
The hippies thought that consumerism's end was just around the corner. Then Madison Avenue learned the value in simulating self-actualization, and catering to those desires. The hippies became the hipsters.
Amen! That reminded me of an essay I love dearly: http://fadeyev.net/moral-design/
http://www.amazon.com/Twilight-Elites-America-After-Meritocr...
From what I see, finding the right guy to manage a company is very hit and miss in the real world. Just look at Ron Johnson. He was previously senior vice president of retail operations at Apple, and then hired as CEO of J.C. Penny. He was fired as CEO from J.C. Penny in 2013, after retail sales were down by 32% and stock prices fell steeply. This was despite him having a very successful tenure at Apple. The pricing should factor in the uncertainty and risk of the performance of someone in the position of CEO.
I have probably have not touched most of things that could be issues here, such as corruption, and that some CEOs are just extremely incompetent. I remember a CEO that was given 250 million dollars to leave because he had that much negative impact on the company he was running. This was someone that the board thought was a great hire.
Anyway, I find the post I am replying to is way too simplistic and looks at CEOs with extremely rose coloured glasses. There is a lot more to consider.
No, this can't be said for every other employee. The best warehouse worker is not adding $1B or anything close to it to the bottom line.
It can be said for some programmers and these programmers do tend to make lots of money. (Though in many cases they are given titles other than "programmer", e.g. "managing director" of a team of 0.) See also top traders - at many firms they can make more than the CEO.
The fact that not all CEOs are perfect doesn't contradict this claim. In fact, if you are attributing JC Penny's 32% loss to the CEO you are supporting the claim of gizi.
Here is an article that shows that higher pay only increases performance until a point, then performance drops: http://eganassociates.com.au/high-ceo-pay-inspires-better-pe... These results came from data that compared CEO remuneration to average employee remuneration. This directly contradicts what Gizi was proposing, because the real world data shows a negative correlation between CEO pay and performance after a point. The full paper is available here http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2529112 if anyone is interested in it.
Consider the GFC, it shows how well upper management really stuffed things up at the largest companies and still got away with it, no problems, still getting huge payouts for sub par leadership. Yet when things go well, the CEO gets bonuses for things that may have had nothing to do with them. Random fluctuations are wrongfully attributed to CEOs, and they get hefty bonuses for it as well. Here is a study that shows this http://www.sciencedaily.com/releases/2015/10/151022192337.ht... , unfortunately the original source is behind a paywall so I am not linking it.
What it shows is that the marginal effect of a CEO is large - multiple percentage points of the company's value. Therefore, the difference in value between a good and bad CEO is equally large.
Gizi: "If the right guy manages the joint, it will do $11 billion. Are you willing to pay 10 million a year for this person?"
Repeat the math with $10B and $7B, and you'll still see that $20M or $50M is a very reasonable pay package to get the guy who is less likely to screw things up. Of course, if you truly believe CEOs have an insignificant effect, I encourage you to invest in companies with CEOs who are perceived as being terrible.
These results came from data that compared CEO remuneration to average employee remuneration.
Your linked study provides very weak support of these claims. It's restricted to bank holding companies and thrifts during the financial crisis. In fact, there is a pretty obvious alternate explanation of it's results - banks with a high pay ratio consist of a CEO + lots of tellers, mortgage officers, etc (e.g., Citi, Countrywide). In contrast, banks with a lower pay ratio consist of CEO + quants, traders, etc (e.g., Goldman, Morgan Stanley).
Can you think of another reason why banks with lots of mortgage officers might have performed worse during the crisis?
The support of having is stronger than you suggest. The study showed a significant negative association between firm performance and pay disparity in the Korean companies as well, from a separate study where more financial information is required to be disclosed.
I will also say that the CEO compensation is reasonable in most companies, it is just that after about the 8th decile performance starts decreasing and risk increases. The real problem seems to be the more extreme CEO to average employee pay ratios.
Can you think of another reason why banks with lots of mortgage officers might have performed worse during the crisis?
A larger pay gap in the executive ranks promotes greater risk-taking.
By the way, there was the highest CEO compensation compared to employee compensation just before the GFC hit.
...I encourage you to invest in companies with CEOs who are perceived as being terrible.
I would say that is terrible advice that has nothing to do with the conversation, as we were discussing pay ratios.
Some programmers, maybe, but very few could move large company's revenue by 10%. And almost certainly no one moving physical stuff around in a warehouse could.
Sure they could. They're the feet on the ground, so to say, and so they have the best insight into inefficiencies which are occurring on a day-to-day basis. You can bet it wasn't a CEO who discovered UPS' "only make right turns" trick. Or Bezos who optimized Amazon's warehouses.
A 10% reduction in costs is very realistic for these kinds of finds, and those reduction in costs are worth more than a 10% increase in revenue.
Does the employee get near what they make the company? I doubt it.
Does the company need to pay the employee near what they make the company? No.
So a company does not need to pay the CEO the difference that they supposedly make the company. They just need to pay what someone will accept to do a similar job (I am not saying worse in any way), just like other employees.
This is what options/share-based compensation seeks to do in large part.
Still, when those packages pay off, people get all kinds of jealous butt-hurt over that as well...
Find huge amount. Say "if only X%" (usually 1% or something else low) then increase of 1%*huge amount which is still a huge amount!
Somehow the argument of "if only X%" is meant to avoid the need to prove that you can, in fact, do X%.
1% of extra revenue is hard. 1% time save across the board is hard. If you claim 1%, you better have some strong arguments as to how you can achieve 1%, not do "handwavy do something with synergy or extra information - even if we just get 1% which is a low number, 1% of something huge is still huge. We think we can do more than 1%!".
It is almost as pervasive as hindsight arguments that ignore risk costs. "I put all my money on black at the roulette table and my business is up 100% in the last year - I will bring huge wins to you".
That's not at all the same as playing roulette and it does not mean this argument is not correct. It's correct in principle, you may want to argue about the degree to which it transfers from smaller companies to larger companies.
It failed to address the fact that it may not even be possible to increase anything. What if revenue is limited by the product? Then it's not the CEO that can impact it. What if the odds of ever changing anything fall as the company grows? Then there's no scale gain for the CEO's work.
There's a huge number of problems that may impede that scenario, and the argument just distracts people away from those.
Something that doesn't involve insta-cloning all the other employees and customers for A/B tests.
Kind of. One problem is that Wall St isn't great at distinguishing between idiot CEOs who sweat companies in the short term but kill them in the long term, M&A shopaholic and management-by-rebrand CEOs who flap around doing a lot of useless stuff with no actual clue, rock stars who grow companies with a vision, and bullshit CEOs who churn through investor cash and wishful thinking but create no real profitability.
1. http://knowledge.wharton.upenn.edu/wp-content/uploads/2014/0...
Star CEO has 0,1% chance of fuck up/year. Good CEO has 0,2% chance. And completely mediocre would be about 0,4%.
Hire three mediocre dudes to CEO the company so that they are always deciding on everything together. You have now 0,064% yearly chance of bancrupty, while you can easily pay them just 300k each.
It seems like high CEO pay is often a result of CEO holding the company as hostage. Not not necessarily conciously, but from shareowners point of view. Distribute the risk of bad moves and you should get OK performance cheaply.
Too many cooks spoil the broth, but a good cook with a hundred scullions can make a lot of good food and investigate a lot of recipes.
When company get's big enough, the role of CEO gets more and more about enabling the employees to create value. Consistency is valuable on it's own right. And it increases as company gets bigger.
Companies typically have board to put a degree of democracy in the big moves. So that mistakes get unlikely as 10 people are not very likely to do the same mistake at the same time. But they are not part of day to day operations, so they usually suffer from lack of data.
I am just saying that paychecks tend to be overestimated by people in the low to medium income brackets. Most of those half million folks work 24/7. Once you divide by the amount of crazy hours they work, they are making more or less like a decently paid engineer...
I am more upset by how much doctors make, for many of them in the end do an office job (they don't have hundreds of families futures in their hands). Also because, in many cases, those incomes are high because of stupid laws rather than market value. While CEO do tend to be more on market value.
When market value is set by the CEOs themselves, the trend in market value is ever upward, as long as there is no pressure in the opposite direction. The highest paid executives have seen their share of the pie grow drastically over the past couple of decades, while fantasy stories of their importance and value get passed around to convince everyone that a CEO making 250 times the average worker salary is perfectly reasonable.
Competence has value, but the royal treatment of C-levels is absurd.
Furthermore, supposing there were some sort of absentee owner effect (boards of directors are comprised of other CEOs, and they conspire to raise each other's pay), you'd expect to see a different market value in closely held corporations. Strangely, the price of a CEO for a closely held corporation closely tracks the price of a CEO for absentee shareholders.
http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=...
The obvious way to fix this is with increased shareholder activism (ala Gordon Gekko), and reducing regulations on hostile takeovers. Possibly also regulating things like poison pills, staggered board elections, etc. Do you favor such rule changes? If not, why not?
This will be unpopular but I think all salaries should be made public. This would allow a lot of people to negotiate better salaries.
I don't know, is what I think I'm trying to say. There hasn't been a lot of data...very few companies are open about the salaries they pay, and there is a definitely hesitation among employees about discussing their salary (and it is often discouraged by the company, to boot).
We have developed a tolerance for executives being paid extravagantly just in the past generation, or so. It wasn't always the case, and it is at least as much a function of what people are willing to accept as what the market necessitates.