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Comment by bkanber | Hacker News Reader

I'm all for taxing the rich and compensating workers fairly.

But:

- Had the company declined, the CEO would have gotten all the blame and been crucified. Can't give blame if you can't also give credit.

- The CEO negotiated this deal, the employees did not.

- A good portion of this $500M is from the value of his stock, which is part of his compensation. I don't know the percentage of this payout that comes from stock (WSJ paywall...), but we certainly can't take stock AWAY from him to reduce his payout.

- Employees who have cashed in their options will also make money from this deal. Other stockholders will make money too.

Again -- I am NOT condoning our American trend of over-paid CEOs. More money in the working class is good for the economy. But this event specifically is not ridiculous.

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Something I find curious is the degree to which HN seems to want to break out the torches and pitchforks when a CEO profits handsomely by increasing shareholder value. There doesn't seem to be the same animus towards ordinary developers becoming millionaires in a few short years by getting lucky and landing at the right unicorn startup pre-IPO.

CEOs interests are aligned perfectly in this situation: increase shareholder value. The vast bulk of CEO pay is derived from the stock that's granted to them and vested over time just like it would be for any employee that received RSUs or stock options.

I don't quite grok the idea that employees with no ownership stake in the company are somehow owed a share of the capital gain when they've got no capital of their own at risk.

A big part of my compensation is commission and another big part is RSUs. If I don't deliver results and if I don't align my goals with that of the major shareholders and the market, I don't make as much money. I don't see how this contravenes the startup/get-rich zeitgeist here in HN.

Capitalism for me but not for thee?

I'm not particularly animated by the issue but I'm also not convinced the compensation has much to do with relative ability and performance. It's based on lucky positioning and risk averse ass covering (the board thinks it is more defensible to pay lots for a star than take a risk paying less).

Who gets to decide this? As I understand it, it's the board of directors that put together a compensation committee. It's not like they are spending your money. They're spending the shareholder's money.

If only you owned stock in CVS or Aetna you'd be able to make your voice heard.

What's your point?

You think I should keep my opinion to myself or something?

I don't understand the animus towards CEO pay. It can easily be applied to any major celebrity or athlete.

If anyone could do what they do, they'd be paid accordingly.

The market (via the shareholders) sets the rate of pay. Why the general public cares about one and not the other is beyond me.

My post questions the ability of the market to price CEO value a lot more than it expresses outrage.

Athletes and celebrities are different, their pay is a natural consequence of gathering lots of attention. A more rational species would substitute cheaper entertainment.

> Athletes and celebrities are different, their pay is a natural consequence of gathering lots of attention.

And a Fortune 500 CEO's pay is a natural consequence of being a Fortune 500 CEO. There are only 500 of them. This is the top of the game, just like pro athletes.

> A more rational species would substitute cheaper entertainment.

But we aren't, and we don't.

"If anyone could do what they do, they'd be paid accordingly."

This is not at all self evident. There is a lot of reporting suggesting CEO compensation is not really tied to the best interests of share holders.

As cited elsewhere in this thread:

http://www.berkshirehathaway.com/letters/2005ltr.pdf

You're right, partially. The thing about free markets is that the average value across all data points will converge to the free market value, and there are outliers on both sides. There are lots of CEOs that are under-paid for their abilities as well as lots of CEOs that are over-paid for their abilities. If you were to look at all CEO salaries averaged over all companies in an industry, you probably would get a pretty fair view of what the average CEO is worth, but of course an N=1 can deviate greatly from the average.

A company's performance may be strongly correlated to a CEO's ability and performance, or not. These salaries aren't set algorithmically and there's no way to predict ahead of time exactly what the impact of a given person on an organization will be. Past performance is not a guarantee of future returns, but there's really nothing else to determine CEO salary by except for experience, fit, and past performance. The salaries are set by whatever the board and shareholders are willing to pay, which is influenced by all the data (objective and subjective alike) -- a central tenet of free markets.

The truth is there's really no other way to do it.

You are begging the question.

First you have to prove that the CEO market is efficient. Then you can praise the free hand.

All free and competitive markets are taken to be efficient. In a market where a million wannabe-CEOs are vying for one of the top 500 spots, you get tough competition and the compensation is commensurate with the level of competition.

Lots of people willing to do the job should drive down the compensation.

High compensation is partly a result of businesses choosing from a small pool of candidates...

Willing, but not able. There are lots of people willing to be astronauts and NFL players too. The small pool represents the top performers, and that's where the competition is.

That, and CEOs benefit from raising other CEOs compensation packages from sitting on each other's boards.

> CEOs interests are aligned perfectly in this situation: increase shareholder value.

That is wrong. The CEO's risk is asymmetric. Huge upside with limited downside, which encourages reckless risk taking. It is also shorter term (until his grants vest), encouraging short term profit over long term value.

> I don't quite grok the idea that employees with no ownership stake in the company are somehow owed a share of the capital gain when they've got no capital of their own at risk.

Is the CEO not an employee? Why would he be owed a share of the capital gain, and other workers not?

His risk isn't asymmetric. He (or she) has got to justify their job each and every quarter to the investors. A couple of bad quarters and you can expect the shareholders to be looking for a scalp and it's usually the CEO.

I think you maybe underestimate the job market for senior executives. It's not like a CEO of a S&P500 company can find another job on LinkedIn. Sometimes they land a new gig. A lot of the times they don't.

I'd also suggest you try the job of leading people and groups of that size. There are very few who can do this sort of work effectively.

Also consider that a CEO has to consider the types of challenges he or she would like to tackle. A Board of Directors is shopping for talent and trying to get the right fit. Why does a CEO not get the same opportunity to negotiate a pay package?

"His risk isn't asymmetric. He (or she) has got to justify their job each and every quarter to the investors. A couple of bad quarters and you can expect the shareholders to be looking for a scalp and it's usually the CEO."

But what actual risk is the CEO taking? Sure, the board might decide to let them go. But that usually comes with a multi-million dollar severance package. They're not hurting. There is no practical downside. On the other hand, someone who gets laid off because of the company tanking does get hurt, through no fault of their own.

"I think you maybe underestimate the job market for senior executives. It's not like a CEO of a S&P500 company can find another job on LinkedIn. Sometimes they land a new gig. A lot of the times they don't."

They land on their feet more often than not. And, again, they're not hurting for money. If they don't find another job, their children are not going to go hungry.

If you got fired from a job that had a potential $500M payday attached to it and only got a $25M severance package at the end of it, trust me, you'd be pretty bummed about it. Go looking for CEOs that got fired and see where they landed. it's one and done for a lot of them.

Again, there is no room for socialist populism here. He negotiated a package and he delivered results. His interests as a CEO are aligned with the shareholders who risk their capital with ownership of the company. They trust the board and the CEO to increase the value of their investment.

Why is this controversial? Why does it matter if he's rich before or after he does the job? All of these guys are already wealthy before they even sign up. They don't need to do this work to survive.

Somehow the notion seems to go around that anyone who makes a boatload of money suddenly has to kowtow to the public on whether or not they deserve that money. That's not how this works.

"If you got fired from a job that had a potential $500M payday attached to it and only got a $25M severance package at the end of it, trust me, you'd be pretty bummed about it."

I'd be bummed. That's it. I wouldn't be wondering if I was going to lose my house, or if I'd still be able to eat.

" His interests as a CEO are aligned with the shareholders who risk their capital with ownership of the company. "

But not with the interests of the employees who risk their human capital.

"Why is this controversial?"

Because those who do the majority of the work making the company successful are not rewarded for it.

Well, in this great country, you're perfectly welcome to start your own company and distribute 95% of the shares to your first 1000 employees.

Tell them they need to work for free for 4 years (or for far below market wages) in order to account for the capital contribution of their labor, comrade, and see how far that gets you.

Ben and Jerry's tried to cap CEO pay at 7x their lowest paid worker and soon realized that nobody wanted the job (or at least nobody that was qualified). Now their current CEO is taking home a whole lot more than that and he's not being paid in Chubby Hubby.

http://abcnews.go.com/Business/companies-follow-ben-jerrys-l...

"I'm talking about Ben Cohen and Jerry Greenfield and their iconoclastic Ben & Jerry's ice cream company.

But it's neither Cherry Garcia nor Phish Food that's on my mind right now—well, maybe just a little—as much as it is the social pact that Messrs. Cohen and Greenfield made with their employees at the start of their venture: From top to bottom, the pay ratio between the highest salaried executive and lowest-earning-worker would be no greater than 5 to 1.

To their credit, the ice cream kings kept to their pay scale deal for 16 years. At that point, Cohen was set to retire and no successor who was willing to accept B&J's compensation compact could be found.

End of an Era

So the bar was raised to 7 to 1 to attract new talent, and ultimately to 17 to 1 over the course of a half dozen years more. The company was then acquired by Unilever USA in 2000, after which the corporate cone of silence descended on what was once a very transparent practice."

"Well, in this great country, you're perfectly welcome to start your own company and distribute 95% of the shares to your first 1000 employees."

That is a cop-out answer that shows that you're not interested in discussing the issue. If you don't see an issue with corporate greed in the world today, that's your prerogative, but don't make it to seem like those who do are the ones who don't know what they're talking about.

That's not how I read their answer. In fact, they spent a lot of time explaining what they meant, while you seem to be the one trying to shut down discussion.

> If you got fired from a job that had a potential $500M payday attached to it and only got a $25M severance package at the end of it, trust me, you'd be pretty bummed about it.

Trust me, I wouldn't be. I pity the person who is bummed to have only $25M.

> He negotiated a package and he delivered results. His interests as a CEO are aligned with the shareholders who risk their capital with ownership of the company. They trust the board and the CEO to increase the value of their investment.

Ever tried getting a CEO's compensation reduced as a shareholder? Warren Buffett describes it as follows: "the deck is stacked against investors when it comes to the CEO’s pay" [1].

[1] http://www.berkshirehathaway.com/letters/2005ltr.pdf

That is outstanding reading. Like the closing quote of that section:

"Though I have served as a director of twenty public companies, only one CEO has put me on his comp committee. Hmmmm . . ."

Everyone in this thread claiming CEOs usually "earn" their compensation needs to read this and explain why Buffet's arguments are wrong.

(Not because it's Buffett, because his arguments are well thought out and reflect a lot of personal experience with the topic.)

> But what actual risk is the CEO taking?

Not much financial risk, no. But they are accountable in many other ways. Personally, I'd never want to be the CEO of a Fortune 500 company, even with a $10M salary.

> usually comes with a multi-million dollar severance package

Only at the top of the game at the largest companies.

> On the other hand, someone who gets laid off because of the company tanking does get hurt, through no fault of their own.

This is of course true, but you're only looking at financial hurt.

> If they don't find another job, their children are not going to go hungry.

For many CEOs, this _was also true_ at some point earlier in their careers.

> Huge upside with limited downside

From your perspective, sure, especially if you're only considering financial downside. There are huge non-financial downside risks, like staking your personal reputation on the performance of the 50,000 person company that you're running. Maybe you don't personally care about those other risks, but CEOs in that position do.

> encourages reckless risk taking

Not all CEOs take reckless risks.

> encouraging short term profit over long term value

This is a function of shareholders, not of CEOs.

> Is the CEO not an employee?

No, the CEO is an Officer of the Corporation and is literally held accountable for the performance of the company. An employee is not. The CEO and CFO of public companies can go to jail for misleading investors, insider trading, falsifying financial reports, etc. There is no such law that holds employees accountable for those things.

> Why would he be owed a share of the capital gain, and other workers not?

Because he owns stock. Anyone is free to buy shares of a public company. Any employee can buy stock and therefore take a share of the capital gain. There are lots of companies that give workers options and even stock grants. CEO compensation packages are designed to be heavy on stock so that the incentive to increase shareholder value becomes personal.

"There are huge non-financial downside risks, like staking your personal reputation on the performance of the 50,000 person company that you're running."

That doesn't actually happen. CEOs get golden parachutes and move on to high paid jobs somewhere else when their company does poorly.

What about my other points?

It's like 80% according to the article:

- $230m from "already-vested stock-appreciation rights"

- $190m from "Aetna common stock he currently owns"

- "Between $60 million and $85 million" as part of a "change-in-control package" which is paid out if he's terminated as a result of the sale.

One of my biggest pet peeves regarding reporting of executive compensation is when the headlines pretend that CEOs are being paid hundreds of millions of dollars in cash, when it's mostly coming from stock-based compensation, which is arguably the most fair way to pay a CEO (if they do poorly leading the company, they make much less money).

> - Had the company declined, the CEO would have gotten all the blame and been crucified. Can't give blame if you can't also give credit.

He was making 10+ million dollars a year already [1], which he would have been able to keep. The worst that could have happened to him if he was underperforming was being fired. Calling it being crucified is ridiculous hyperbole.

[1] https://en.wikipedia.org/wiki/Mark_Bertolini

"Had the company declined, the CEO would have gotten all the blame and been crucified."

Hahaha, that's a good one.

The CEO would get a golden parachute payout and move onto another highly paid position.

If you want a golden parachute like that, then you also need to be one of the top 500 or 1000 sought-after CEOs in the country. Just like if you want a pro footballer's (NFL) salary, you need to be one of the top 1500 players. Software engineers like me and (probably) you don't get golden parachutes because we're not one in 500, we're one in a million.

Football players are good comparison. If they don't play well, they are just cut and not paid anything. No "golden parachutes" for poor performance.

They do get golden parachutes. If you're a pro football player and you get benched in game 1 with a season-ending injury, you still get paid. If you get cut for poor performance before your contract's guaranteed payout is paid, you still get that money. That is the golden parachute.

"- Had the company declined, the CEO would have gotten all the blame and been crucified. Can't give blame if you can't also give credit."

And he would have been given a golden parachute worth far more than most of us will see in our lifetimes. His family wouldn't go hungry or homeless. At the same time, many employees will get laid off, and their families will have a very real chance of going hungry or homeless.

Yes, that's true. When a pro NFL player gets injured in game 1 and has to sit out the rest of the season, they still get paid. If I get injured and can't code, I'm screwed. If we're talking about Fortune 500 CEOs, we're talking about pros at the top of the game where the economics are totally different. If you want a golden parachute like the Fortune 500 CEOs get, you also have to be one of the 500 -- just like I'd have to be a pro NFL player in order to get paid millions of dollars while sitting on an injury.

Then why not get rid of the rest of the employees and just hire a dozen like him since he is bringing all the value.

You need exactly 1 in the organization. No more, no less. Can you deduce why a collective or cluster hasn't replaced the role? I'd imagine the answer is blame, but I'd like to know what you think.

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