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Comment by klyrs | Hacker News Reader

Why is paying them less not seen as an option? I've seen multiple startups struggle because their CEO makes more than 10 qualified technical staff, where the employees burn out because there's no budget to hire the technical staff the company needs.

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> I've seen multiple startups struggle because their CEO makes more than 10 qualified technical staff,

The fully loaded cost of a qualified developer begins in the six figures. A CEO earning 10x that would be earning 7 figures.

I've never seen an actual startup with a CEO earning 7 figure cash compensation. I don't think any reasonable investors or even board members would allow that.

Startup CEOs are largely compensated in equity, with their cash compensation being significant ($100-200K if company has revenue) but not overwhelming. They're often not the highest paid person in the company in terms of cash + bonus.

This.

This is a startup that is in fail mode, unless the CEO is raising obscene amounts of money and the business is progressing.

Yeah, you're right, I guess I've only seen ~5x at proper startups, but when you multiply that by the number of executives, it's still an egregious impediment to the product

Event that is pretty rare in startups IME. Typically it might be 2x-3x a (truly) sr. dev, but CEO's in "proper" startups tend to be equity heavy and salary light, like other employees. Equity difference will be a much higher multiple than salary.

This is a sign of a startup you should not work at. CEO comp in a startup should be tied to the success of the company in the form of stock. Generally in a tech type startup the salary (cash) of the key developers and the CEO are around the same. The highest comp is on the sales side. The sales team joins late (the founders and CEO should drive sales at the start) and tend to get way less stock. Their comp is based on a base salary and commission which should be uncapped.

Presumably because the market dictates their salary, not a vague notion of what they should be paid.

Or, to reframe the question: why don't people hire cheaper CEOs?

> Presumably because the market dictates their salary

Ahh yes, when the "market" is primarily made up of other CEOs (i.e. who sit on corporate boards), whose primary vested interested is to ensure CEO salaries stay astronomically high.

isn't the solution, then, to put the workers on the board?

Why don't we see more private equity firms snapping up companies and hiring cheaper CEOs then?

The simple answer is that people don't hire cheaper CEOs because the people who hire CEOs are the boards of companies and the boards of companies are mainly staffed by CEOs of other companies who unsurprisingly are incentivized to advocate for higher CEO pay.

They why do people who own the companies not oust board members who are wasting their money?

Because the people who own companies are either a) disinterested index funds, or b) members of the same plutocrat class as the board members and CEOs.

Why are the people in b) okay with overpaying for something?

Because they're also getting overpayed in a similar situation at a different company. It's in their direct interest to raise the "market rate"

So a significant portion of owners employ each other at each others’ companies?

You're talking about employment as if they're working 9 - 5 in construction. These people are amplified by their networks, they don't work for eachother. The better their networks performs, by connections, or by value, or by whatever metric you want to monitor, the more they perform...

What about private equity firms?

Likely because most public companies are mostly owned by funds of one sort or another which either don't hold the stock long term or own the stock because of indexing. In the former case, the incentive is to select for CEOs who raise the stock price in the short term. In the latter case, there is no incentive for fund managers to influence management at all.

The discussion is why the board does not select cheaper CEOs. In the case of these supposed funds that are not interested in the stock long term, is the claim that a more expensive CEO will deliver them better short term results? If not, why would a fund that cares about short term results want to overpay for a CEO?

This is called the Agency Problem and is a fundamental challenge of organizing humans. If you start separating who makes decisions (e.g. the board) from who benefits (theoretically, shareholders), then over time the former will subvert the latter. But there is no simple fix if you want investment returns without managing the company.

This is one of the better reasons to bet on startups in a world where power accumulates advantage. During the growth stage of a startup, the incentives of owners, managers and team members are much more aligned than they will be later in the trajectory.

The average size of the board of a company in the S&P 500 is 10.8 directors. However, only 43% of CEOs serve on any outside boards. The implication is that the vast majority of board directors are not CEOs of large companies.

Data from https://www.briefinggovernance.com/2016/12/board-composition...

It's more appropriate to think of this as a class of "the pool of people who might become CEO". It's CEO, CTO, CIO, board members who also have their compensation decided by similar mechanisms, retired CXOs.

Let's take Intel as an example - Retired CEO of medtronic, CEO of Intel, Sequoia, Senior position at Square, former CEO of a foundation, Professor, EVP and CFO Boeing, former CEO of HP, CEO of EA, Darwin Capital.

So in total, of a board of 10, 6 of them are current or former CXOs, 1 is a professor, 2 are VCs and 1 is a senior CXO style position. Yet most of those wouldn't be counted as "CEOs" because they're "retired".

Sounds like a board could make a killing by hiring a competent CEO on the cheap instead of their friends. Or maybe the reality is that the CEO compensation is a drop in bucket compared to the CEOs positive or negative effect on the bottom line and so it doesn’t make sense to cheap out.

Wrong. You hire a cheap CEO, you will get what you pay for. The best people aren’t going to work for cheap, so you’ll get a shitty or mediocre CEO who will wreck the company.

Maybe sometimes you get lucky and get a great CEO for cheap, but that’s not sustainable. You’re fighting the trend.

I think part of the problem is that we equate cost to value. Unless I am employing a CEO who previously earned big bucks and has taken a pay cut, someone on $50K simply doesn't seem to be as good as someone on $500K.

Of course, there are people who could do really well on less but then how many of the cheaper CEOs would then ask why they can't be paid more if their companies are making multi-millions and it is a lot to do with the CEOs strategic decisions?

To be fair, a lot of leadership is about confidence in yourself and people who are confident will often ask for a high salary.

To be fair, I don't know what the distribution of salaries in the UK is but there are plenty of company directors and CEOs who are definitely earning below £100K-£200K, even at financial companies. (about $140K-$240K) whereas in the US, I think it is much higher.

What kind of Mickey Mouse start-up is that? CEO cash pay should be low and stock pay high.

That happens with non-profits too...

> Why is paying them less not seen as an option?

I don't understand - do you think companies are voluntarily paying them money that they don't have to?

If you won't pay them what they want they'll go elsewhere to someone that will.

Just like you would, I presume.

"the people who hire CEOs are the boards of companies and the boards of companies are mainly staffed by CEOs of other companies who unsurprisingly are incentivized to advocate for higher CEO pay."

Very often investors sit on boards, too

Why would investors vote for board members that waste their money?

Class solidarity.

I don't know what you're imagining here.

Imagine a charity or pension fund that invests in a company. What incentive do you think they have to spend money unnecessarily on CEO compensation?

The conversation around Mitchell Baker's compensation was particularly illuminating, I think. Why do nonprofits pay CEOs millions a year? Because executives expect to be paid that much, and it would be demeaning to pay less.

In other words, normal market forces. The same reason you're paid whatever you're paid.

The "invisible hand" of plutocrats isn't the traditional meaning of "market forces", is it?

Rich people's evil plan to give other people money and drive wages up. Got it.

People are always talking about the free market as if it was some kind of self regulating physical law of nature that could never be wrong.

What's so absurd to think that people from one class (CEOs/VC/etc) want to help people from that same class even if it's against the laws of the free market?

If I help someone who kinda identfies with me, it raises the chance that they will help me/my friends/my family in the future.

> What's so absurd

Because it goes against Occam's razor.

People pay CEOs a lot. Why do they do that?

Likely: because they have to.

Unlikely: global conspiratorial private welfare programme.

You think investors pay money out of their own pocket to CEOs out of altruism?

Do you think investors are, as a rule, rational in the sense presumed by the efficient market hypothesis? Do you think they might be subject to biases that lead them to overvalue their own self worth, and by extension, the worth of people like them?

You made the value judgement, not me. I'd put it down to "keeping up with the Joneses", personally.

"keeping up with the Joneses" by... pushing the Joneses up? Does not compute.

The problem is this market is disproportionately influenced by the people it's pricing.

Yes, but that implies that they bring something valuable to the company if companies are still willing to pay these premiums instead of just moving up an employee to CEO. So, what is the problem in the first place?

> So, what is the problem in the first place?

I don't think there is any problem. Everyone's entitled to as much money as they're able to honestly negotiate.

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