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Comment by ARandomerDude | Hacker News Reader

CEOs aren't paid for the day-to-day value they provide to the company. They're paid for the long-term, strategic value the owners think they might provide the company in comparison to other candidates. So if you think CEO Candidate X will make you a 3x return on your investment, but CEO Candidate Y will make you a 5x return, it's almost certainly worth it to pay him/her the extra $200K to get you there, if that's the market demand. You're paying for experience, contact network, etc. in a job like that much more than you are how many widgets they can produce on an assembly line.

So it seems that the idea that a CEO could be automated misses the point of what CEOs do and how they get hired.

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They should then be compensated with a leveraged long-term derivative product that pays based on the stock difference between their company and the industry, 5 to 10 years apart.

"You want to be insanely rich? Here's a huge company that's not yours as a resource, now make it so it is the best one in 10 years!"

The problem is that the best CEOs might not go for that. There are a lot of long term things that can impact a company for the negative, and you don't want your CEO bailing to a different company the moment that some macro event (semiconductor shortage, new competitor, global pandemic, etc) comes along and alters the long term upside of your company.

You want a CEO who is going to stick around and make the best possible decisions to improve the company's trajectory, even if that mostly means keeping the company flat as opposed to faceplanting.

> the best CEOs might not go for that. There are a lot of long term things that can impact a company for the negative

You could develop a financial services company selling hedges for that risk to CEOs/executives?

> alters the long term upside of your company

I don't see how this is worse than short-term stock compensation

> I don't see how this is worse than short-term stock compensation

The CEO has an incentive not to destroy the existing value in pursuit of large gains. With compensation based on the industry spread, they may as well risk any existing value as it is worthless to them.

Currently: A CEO who does nothing but keep the stock price where it is would get 2 million. If he performs as well as average, he might get 4 million. If he beats the industry, he gets 6 million.

With leveraged spread system: A CEO who does nothing but keeps the stock price stable gets 0. A CEO who performs as well as industry gets 0. If he beats industry, he gets 6.

> The problem is that the best CEOs might not go for that.

We created that system, we can change it. CEO entitlement is part of the problem because it has become burned into our culture that they are demigods. They are not.

Ever worked for a company with a truly garbage CEO?? Good heavens, when you’ve got a moron there, you might as well be an air traffic controller at asshole airport.

Wouldn't it only make sense to gamble away the company in that scenario? Heads you win and the options pays out big, tails bankruptcy, but the option is worth the same as if you just did mediocre (worth nothing).

I find it funny that people throw out decades of history. Options contracts, as you propose, introduce the incentive for extreme risk taking because doing "normal boring" things literally doesn't pay. It's one of the main arguments for stock compensation because if the company does poorly, the CEO directly feels it where it hurts (the wallet).

And so they go for stock buyback strategies. Reduce the supply, the stock skyrockets, cash in, leave.

You need profits for stock buybacks. Buybacks are just superior to dividends as a way to return capital.

Dividends ought to not be at a tax disadvantage over capital gains for this reason.

The problem is also unrealised gains vs realised ones. I don't pay any tax on the stock price increasing. I have to pay tax on dividends.

If I don't need the money, I can just let it continue to grow tax free.

Are they not? I thought qualified dividends (that is, dividends on stocks that have been held long enough to qualify for long-term capital gains) are taxed at the long-term capital gains rate.

You still have the one year of dividends taxed at the short-term rate, since dividends are taxed on disbursement whereas capital gains is only taxed on stock sale.

Dividends are taxable at the time of distribution; the price effects of a buyback are taxable when shares are sold [1], and delayed taxes are preferable to immediate taxes.

[1] unless the holder has elected for trader tax treatment, in which case shares are marked to market at the end of the tax year

>You need profits for stock buybacks.

You merely need capital. Lots of buybacks are funded by debt

This is pretty insane actually. Is there a common metric that captures which companies are funding buybacks with debt? or is it easy to figure out? I am not a finance person.

If the long term debt increases during a period of buybacks, particularly more than net income, than yeah this is the case. And yes that happens.

BTW, this is exactly what private equity companies do when they take a company private. They borrow a lot of money to buy the outstanding stock. Often the company they are buying with debt (held by the company) is not profitable. And sometimes the company goes bankrupt.

So yes this happens.

With interest rates as low as they are (on both government backed and corporate investment grade bonds) and a reasonable forecast of higher inflation ahead, why shouldn't companies borrow for a variety of corporate activities, both operational and treasury?

They should, and they should use the money to do the corporate activities you mentioned.

No. But it's generally common knowledge. Here are some articles

https://fortune.com/2019/08/20/stock-buybacks-debt-financed/

https://www.cnbc.com/2019/07/29/buybacks-companies-increasin...

https://crsreports.congress.gov/product/pdf/IF/IF11393

From the last one: "Data on the percentage of buybacks that are leveraged are inconsistent. For example, the bank J.P. Morgan Chase reported that leveraged buybacks accounted for 14% of overall buybacks during 2018, which it said was the lowest percentage since 2009. But Yardeni Research, a respected securities market research firm, reported that they were 56% of the total."

this is another one of those things you learn in business school, a commonly disdained yet imminently useful education, particularly for engineers.

> funded by debt

Or recently, government support packages.

Which is debt.

Leveraged buybacks reduce the multiple. It’s not a cheat code to make your stock go up.

A lot of the companies getting into debt have their own cash reserves.

I think most criticism of buybacks would go away if we eliminated the capital gains tax and treated income equally regardless of where it comes from.

Strictly no. You need "free" zero interest money from the Fed! That's how MOST stock buy-backs are financed - it going onto the balance sheet as debt which someday will bite them.

This is the shitty side of many modern CEOs. But the legal and tax incentives combined with Wall Street demands create the environment for it.

The only reason I dislike stock buybacks is that they encourage "riding" the bull market. Number goes up, people buy into the company, company does a stock buyback to keep the momentum, numbers go up even further, even more people buy into the stock, none of them caring about the actual company they are buying into, they just see the numbers.

Dividends are boring, we need more boring companies doing boring productive work.

Replace option contracts with RSUs or a vesting cliff and see how closely that resembles the VC fiefdom

this all sounds a lot like CEO talk to me...

I mean

Just make a contract to pay them a decent amount of the company doesnt go tits up

what makes you think this isn't already the case? CEO comps often include stock options.

If you prevent CEOs from selling their stock for the next X years, sure.

Isn't that also usually the case? There's generally a vesting period.

So what incentive does that CEO have to be cautious with my capital?

That just encourages extreme risk.

Isn't part of the problem the overlap between action and effect?

I might join a business as CEO and it does really well for 5 years because of the previous CEO, I could claim that it is my leadership and ask for my bonus.

On the other hand, maybe I do well but my successor is an idiot and makes the company tank so now I won't get my 10 year bonus because they screwed it all up.

Unless your idea only works for CEOs who are prepared to stay for 10 years? That then brings in the complication of when you need them to leave quietly because they are rubbish but you don't want your shareholders to know!

this is the problem with any leadership position in general, congress, president.... etc

I think the best way to address this is to provide standardize kpi monitoring.

When a measure becomes a target, it ceases to be a good measure

Especially for a CEO, who has quite a bit of power to optimize for any measure, it's going to be very hard to craft a measure that gives the results you want and can't be gamed. The most likely outcome is something that's just a worse version of the stock price, because the stock price is just a forward-looking approximation of net income, which is what you'd mostly want to optimize for anyway (ignoring things like B corps).

I find this statement strange. Curious if others experience aligns with mine:

Being a CEO is all consuming.

You don’t want to be a parent and a CEO, cause the company comes first.

You don’t want to be married and a CEO, because the company comes first.

If you could “automate” this job, the developers behind the scripts become de facto CEO. Their scripts cannot fail. They will have to make the same sacrifices as the meatspace CEO.

I dunno if it’s an Icarus thing or what, but the closer I am in interactions with ceos, the more I pity them.

Asking these people to trade their lives for the possibility of no payout seems doomed to fail. The only reason people trade their lives for this role is because it is worth the personal damage and risk.

When I worked in the game industry QA folks were regularly asked to put in twelve to sixteen hours a day - they're sacrificing their health and lives for their jobs but without any promise of payout. Ditto for pretty much anyone else working on the bottom 3/4ths of the economy.

My immediate reaction is the diff between CEO and QA is that QA doesn’t negotiate well.

They’re willing to endure bad work for limited pay. You don’t want this type of person leading a company.

I’ve also worked (and left) the field of gaming QA. FWIW, I’m not trying to being controversial- this is my sincerely held belief. I think gaming QA is a good foot in the door to a career in tech, but something that should be abandoned as soon as you get a feel for what it takes to work in an agile environment and make your deliverables. The gaming industry seems like the place where you go to kill your health and happiness to me. As long as people keep signing up for the work, conditions will be awful.

I would suggest a different take-away, it takes power and stability to negotiate power. Basically, you need to have a powerful position to gamble on securing better compensation. If minimum wage were a problem unique to QA[1] then that explanation might ring true but I think the fact that you see the same pattern of exploitation in fast-food and the service sector at large paints a clearer picture that our educational system is just failing to teach people they have personal value.

I do agree that the difference between a good CEO and a terrible CEO can be pretty stark - but I also think that the best CEO can't turn around a company rife with nepotism and other organizational diseases - the plebs contribute a lot more to company health than they're given credit for... That's my primary source of disagreement on CEO compensation - everyone else is being undervalued and so the creation of value is being misattributed to a CEO. The CEO should probably be the highest earner at nearly every company - but only rarely should the CEO earn five or six times that of someone in the mail room and we shouldn't see the 200:1 ratios that are relative common today[2].

1. It does have a unique exacerbating factor, every year a bunch of new grads think "Oh man, video games - I want to work on those" and thus there's a large pool of people willing to be paid peanuts to work in the field. This causes the experienced QA folks to have their labour devalued to compete with the large pool of free labour. I very much agree with your last few sentences - that's what seems to be the take-away for the gaming industry for me as well.

2. A random study - I know the numbers are in this ballpark but I'm not familiar with the specifics https://www.epi.org/publication/ceo-compensation-2018/

The issue is what if the CEO refuses. If he's good at his job or the business is in need he could always go to a different company and get paid what he can negotiate for.

They should be compensated however their board says they should be compensated. You don't get a say in that.

I could say that all German people should wear purple shirts. It doesn't much matter unless I have a proposed method to enforce it.

All incentive models for ceos miss the point, that incentives do not work. People will just fulfill the metric, without incentive most people will do what is best for the company.

Sure. Quite. But why not try developing an AI to replace them that can make you a >5x return?

Because they may be so expensive precisely because it’s difficult to automate them.

Careful what you wish for here.

I suspect that if an AI can replace the job of a CEO then all other jobs will be gone as well.

The fact that the western society finds job automation to be a danger (or dystopian) is an indicator that something is severely dated at best--or dangerously corrupt at worst--with our economic system.

Such a thing would be a utopian outcome. If this kind work can be automated in a humane way, then the vast majority of work can be automated. That means people can be freed to spend every waking moment on art and play.

How are resources allocated in this utopia?

My personal guess is - assuming that democracy is in tact, redistribution will be voted in with landslide support.

In a hypothetical future where almost nobody can compete with an AGI and 90% of voters find themselves completely useless in the economy, the proportion of voters who are against redistribution will drop precipitously.

Then what?

Everyone is allocated the same by the state? A society where no-one has any function to society and where the state allocates resources to individuals sounds more dystopian than utopian to me...

I was merely stating what I expect to happen, not what I want.

It sounds pretty bad to me as well. Not worse than poverty, but meaningless and boring otherwise. Some people will make their own meaning, but many won't.

Going off on a tangent here, but I'm curious to know what would be meaningless and boring about it. This would permanently solve the first two foundations of Maslow's hierarchy of needs so people can focus on the top three.

It could be argued that the truth is actually the reverse: it would enable most people to find a much deeper meaning, while only an exclusive few (probably mostly pathological people, like sociopaths and narcissists) won't.

You're possibly right, but do people who inherit millions or win the lottery strike you as particularly happy after 10 years?

Admittedly, I only have anecdotal data on that.

That's not generally a good measure, because a) the people who play the lottery tend to be poorer, and b) poorer people tend to have poorer financial literacy/education.

This means that they don't know what to do with that massive windfall, they manage it poorly or are taken advantage of, and end up unhappy. And the ones who do know what to do with it tend to do very boring things (set up iron-clad structured annuities or something, I imagine—I don't claim to have enough financial education to do it well myself!), and we don't hear about them because "guy won $500m 20 years ago, is living a comfortable but unremarkable life now" doesn't sell papers.

Note that this is also very different from how a UBI would affect people, because that would be moderate amounts of money regularly for life (y'know...rather like an iron-clad structured annuity); there's no way to "blow it" and end up with nothing.

People who inherit very large sums of money, but are not themselves born into wealth, are so rare as to be essentially a myth. There certainly aren't enough of them to make a reasonably rigorous sample size for a scientific study.

The ones that were able to keep their anonymity and didn't engage in fiscally irresponsible behavior like drug purchases and $200k+ vehicles are probably very happy after 10 years.

Do you really think the people who wouldn't make their own meaning are finding tons of purpose in their current jobs?

I might be wrong:

https://users.nber.org/~confer/2001/midmf01/oswald.pdf

Doing this would require an AGI, which is currently out of reach.

A more useful/practical question would be: what tools can we build to assist CEOs in their decision making and make them more productive? I think the answer will come out as "not much", since the job is so high level and abstract. You'd have a better time targeting lower-skilled jobs or technical jobs like software engineering.

> A more useful/practical question would be: what tools can we build to assist CEOs in their decision making and make them more productive?

They are called data scientists. An AI would be able to crunch numbers, but someone needs to read and interpret the results. You can't automate that part yet, humans are still the best in interpreting data into social and business context.

Explain why an AGI is needed? Because to me, invoking the need for an AGI sounds equivalent to saying you don't understand the problem space.

The job of a CEO would need AGI because it's the type of job that requires understanding of human social dynamics, market context, regulatory context, etc. Such cross domain multi faceted expertise is the type of thing that needs general and broad intelligence to do effectively.

Hire people, fire people, pitch investors, manage direct reports across multiple business lines, understand what's going on in the world and market, set a product vision/direction, shape the culture of the org, etc etc. That's AGI territory.

I have mixed feelings between your response and the response you are replying to. One one hand I can clearly see how what you're saying makes sense. On the other, I still am inclined to believe that if you really distilled the actual purpose of everything you mentioned, it could be formulated in a way that doesn't require AGI.

I think one thing to consider is the non-stationary distributions in the problem space.

We may be able to formulate our current understanding of what it takes to be a CEO in every feasible future context that we can imagine, and create an agent (not an AGI) that does that.

But then what would happen when the distributions change out of sample in an unforseeable way? Suppose two countries go to war and this drastically changes the operating environment of the business. The agent would need to learn how to operate with human-level capability in this novel environment which it wasn't trained specifically to do. That's why I'm thinking it requires an AGI.

No reason not to try. That said I don't think it's possible. I love the thought that we can automate that but realistically not viable in the next 50 years. Maybe a bot version of a CEO but that provides little value.

If one could automate that job, one could automate every job. That's AGI territory.

Very creative jobs involving leading people will be the last jobs to fall to automation - assuming that's even possible.

Because ML (this is what people mean when using the term AI which is ambiguous) needs some data to learn from, and this - apart from the fact that learning on a living organism like a company can be extremely expensive - poses several problems:

1. What data do you use? Past data of the same company? Data of other companies? Which ones? Past best performers?

2. Actually identifying all pieces of information that are relevant for decision making is a challenge in itself, as we're not talking about internal metrics but also external events and trends. Choosing and collecting all these is a challenge in itself. Moreover, it is not a one-off action, it needs to be reevaluated regularly, i.e. you need to be actively looking for factors influencing the performance of the company. Mind you, not all of them are readily measurable.

3. Part of the work of CEO is creative, i.e. not extrapolating based on past events but looking for completely new avenues and opportunities. Building such a complex system would be extremely expensive, although I agree this challenge is very interesting.

Not to mention the fact that an extremely important job of the CEO is to deal with people, not just the data. This point alone can make a difference between a well- and badly-managed company.

The problem is there's no way to evaluate if CEO($10M) is actually that much better than CEO($2M). How would you retroactively test the counterfactual of hiring the cheaper candidate?

Maybe in the future the stock price of robo-CEO companies can be used as a baseline. If you can't beat the robot index, then you're fired. (Obviously this will never happen because the board members are other CEOs, but you get the idea).

This. A more practical approach would be to embrace the fact that no one really knows what's going to happen & plan accordingly.

You're spot on. That's why Harvard Busiess Reviews "best CEO" list is a trailing version of multi-year TSR (total shareholder return) combined with some ESG metrics. It's the best you can currently do.

Lots of people said the same thing about market traders and yet a great deal of their activity has been successfully automated.

One person cannot by her/him self return 3x or 5x profit. Its always about the team. And good team leaders are very hard to get by.

That doesn't matter, because it's generally the CEO who puts together the team, motivates it, keeps it accountable, etc.

Obviously the board has input on the rest of the C-suite, but it's still most fundamentally the CEO who is responsible for the team.

That's probably not true, at least in the sense that op intended.

It's almost certain that Steve jobs or Elon musk were much more than 3-5x more productive than the next best options facing their companies, for example.

There's another thing that CEOs do which is provide values guidance and inspirational leadership for a company. That's not something a robot can do...yet.

That might be what they are supposed to do but apart from my current company, this has happened in precisely none of my previous employers (about 5 of them).

At one company, I didn't even know who the CEO was. We had some company party because we won an award and I had to ask my colleague who the guy was who was speaking. Awkward (but at least I didn't have to ask the CEO who he was).

LOL that happened to me once. I was at some unrelated event and was wearing a company shirt. Someone mentioned to me that her husband worked there. She said his name, and I remarked that I didn't know of him. She sort of stared at me and said with a tone of incredulity, "he's the company vice president!"

Extremely well paid CEO’s fail all the time. There is zero evidence that rewarding CEO’s with absurd amounts of money makes any difference to the long term outcome of the companies they manage. Any idiot can buy back shares to boost share prices and/or cut cost to make the company more valuable short term and fail long term.

After dealing personally with a few CEOs (good and bad), I’ve come to the conclusion they’re paid proportionally to the amount of damage they can cause.

This probably applies to many other professions. Doctors come to mind. Teachers and police don’t, though.

A CEO also gets high pay because of their performance can be measured. Stock price, how soon a crisis is handled, employee attrition, and etc. I forgot who discussed it in depth, maybe Paul Graham, and the conclusion was that engineers should learn from the lesson, and figure out a way to show measurable impact, the true visibility, of their work.

They're paid for the long-term, strategic value the owners think they might provide the company in comparison to other candidates.

Mostly I think they are paid according to a compensation committee made up of board members and other executives. It's not a surprise that these people have voted for huge wage rises for each other.

The performance of a business can be measured by a machine in finite metrics. Things like opportunity cost are a reliable way for machines to make this determination. You give it your business metrics and tell it which ones are variable. Then run the simulation over and over with different levels of risk tolerance, risk appetite, political factors ect and see which ones result in the highest opportunity cost. Then you run the next simulation assuming the previous one is reality and keep extrapolating a beneficial future for the company. 24/7/365.

It is naive to think that every other position within a company could be eliminated except the CEO. Of course it could be, and eventually you can expect that it will be. It's when humans are no longer the shareholders that we all need to be concerned. If we're still alive.

And you have only one CEO - so their comp is expensive, but not hugely expensive relative to total org costs.

Apple has Tim Cook. In terms of investors evaluation of his ability to generate profits - let's say apple is going to do $400B in sales, and you think Tim's approach over time will yield a 3% improved margin. Is he then worth $12B/year? CEO's have enormous influence on a companies direction.

Investors will automate MANY MANY things before they automotive the CEO's job.

Let's be a bit serious. What would make Walmart investors more nervous:

1) Being asked to pay all workers $35/hr, or

2) paying the CEO an extra $1M/year?

1.6M employees * 40K+ pay increase = $64 Billion per YEAR. Let's get a grip on what

Yes, comparing CEO compensation to what line workers make is a standard play for the outrage promoters, but it really isn't related. When one slice of the pie is already small, making it smaller doesn't make a lot more available for everyone else.

Walmart's annual profit is ~$130B so what I'm seeing is that yes in fact it's perfectly feasible for 1.6M Walmart employees to get a $40K/yr raise.

Please don't make up stuff on HN - if you don't have something accurate to share or if it wouldn't support your point please still avoid making things up.

Walmart's profit margin is generally 2-3% and is generally $10 - $20B per year. [1]

And if Walmart were making $100B, the comp for their CEO be far from a major expense to the corp.

[1] - https://finance.yahoo.com/quote/WMT/financials/

I think you might be missing the part that says "All numbers in thousands" on that table you've linked.

No he isn't.

I think you might be misunderstanding what "All numbers in thousands" means on that table she linked.

EDIT: To be clear, Walmart's revenue in 2020 was 559 Billion with a B[0].

We can see on that table[1] that if we take the values listed in the "Total Revenue" row (559 Million with an M, 523 Million with an M, etc) and multiply them by 1,000 according to the directions ("All numbers in thousands") on the chart that we get a result which aligns with reality.

To be even more clear, we can take the values listed in the "Gross Profit" row, multiply by 1,000 as instructed by the directions, and see that yes Walmart's annual *gross profit* is ~130B

138,836,000 * 1,000 = 138,836,000,000

[0]https://www.forbes.com/sites/shelleykohan/2021/02/18/walmart...

[1]https://finance.yahoo.com/quote/WMT/financials/

Why are you trolling on HN?

Edit: yes, Walmart's revenue is 500+ billion. What does that have to do with anything discussed here? temp667's comment is correct.

Edit 2: first you didn't understand what "revenue" is, now you don't understand what "gross profit" is.

You're looking at the wrong number. See how it says "Operating Expenses" right below "Gross Income"? You're going to need to subtract that, then you're at operating income. Subtract operating income expenses and you're at pre-tax income. Subtract the tax and then you have what you might actually consider "profit". It's less than 10% of your original figure.

Thank you for actually helping!

It's also perfectly feasible for them to pay more rent for their stores, or pay their suppliers more for their products, but why would they?

The general idea is that if your workers are well paid and the store is well kept (if you would accept that "pay more rent" is generally the same as "spending more on the building") then customers will be more happy/satisfied and thus return more often, spend more, and recommend your store to friends thus increasing your revenue.

Do you honestly think they would come out ahead in this scenario?

You seem to be misunderstanding what "Gross Profit" represents.

You're looking at gross profit, but you really need to look at net income, which averages about $13B.

Companies like Wal-Mart generally have low profit margins, because there's not much of a barrier of entry and no valuable brand or intellectual property.

> ...you think Tim's approach over time will yield a 3% improved margin

It's not so much about a little extra yield, it's about not running the company into the ground, which is far harder than it may appear.

If a CEO manages to leave the company in as good a condition as they found it, that's already worth a fortune.

That assumes you can predict which CEO will do better, not at all a certain thing.

This seems to miss one of the main points of the article that they are happy to dish out automation to other roles but can't quite bring it to bear on themselves...

Nice. We finally found the guy who believes this fairy tale!

Anyone who pays a CEO well believes this. Can you find a large company that doesn't believe it?

Hahaha found the CEO?

'Jesus Christ himself isnt worth 500x the worker's wages'

CEOs provide no real value, period. They also get golden parachutes even if they sink the ship.

It's inexcusable and I'll bet dollars to donuts 99% of companies don't even need one.

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