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Comment by rurp | Hacker News Reader

It blows my mind the degree to which

1. C-level execs are given massive compensation, with the justification that a good one is well worth the price.

AND

2. There's no good objective way to measure C-level performance.

That alone should make people deeply suspicious about these compensation packages. On top of that, the best person for a given CXO job often just so happens to be a golfing buddy and/or have outside business dealings with half the board.

I'm not surprised by ambitous execs grabbing what they can, it's what they do after all, but I am pretty disturbed by how many people outside of those elite cliques will carry water for them and pretend like the C-level hiring market is some sort of efficient meritocracy.

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It's a game theoretical ratchet:

- My friends will tell me who they know

- People are responsible for their own hiring

- If I recommend this guy and he's at least acceptable, my network grows

- If the guy I recommend is not that good, all three will make excuses: my mate who hired him (will blame chemistry/randomness or me), the dude himself (will blame chemistry/randomness or me), and me (will blame chemistry/randomness). Since we're all adults, you can't blame someone else for your lack of due diligence, so it's a shame their styles were so different and the market turned against their brilliant plan.

- Nobody ever gets blacklisted for bad recommendations

- Everyone is complacent about who they will recommend

- My network grows, and I don't need to grill everyone. So my network grows.

Of course what this also means is if you don't happen to be in one of these networks of mediocre people, you are totally out of luck because those networks are big enough that someone will be found, just not you.

Your compensation is determined by your power within an organization, not your contribution to it.

What blows my mind is the degree to which people believe that perfect competition exists everywhere and “the market” will fix all inefficiencies.

Edit: I want to make clear that I am not denigrating the value of markets, I’m only looking to point out the idealization that exists in many people’s minds, especially as I have encountered on this exact forum.

> “the market” will fix all inefficiencies.

The market does fix many such inefficiences - just not in the way which most people imagine.

It is rather that the market fix is that in the long term [!] such companies will go bust or at least become shadows of their former selves.

Unless all companies do things in such ways, equally inefficient

(I mean, if powerful execs get lots of money everywhere? almost)

> Unless all companies do things in such ways, equally inefficient

Keep in mind that there also exists competition from companies from other countries, such as China.

Not really. If a company from a fundamentally different economic framework were to become dominant in core industries it would be banned.

That is not the end game because small companies, startups, etc. are more efficient than big ones and have no ingrained culture that prevents innovation.

Eventually some of those small companies become inefficient big companies. We see this struggle recently in the news, with the CEOs of Facebook and Google talking about how they need to become more efficient, maybe certain people shouldn't be there, etc. -- they got big when times were good and now they struggle with the inevitable consequences of bigness.

This has happened many times. Nobody saw Microsoft coming in the 1970s to dethrone IBM. Microsoft didn't see Google coming and still can't beat them on search, they didn't see AWS coming and is catching up on cloud years later, etc. Most of the automotive industry thought Tesla could not scale and would go out of business years ago.

That happens sometimes. Many times, the variance in launching a small company is so high that the risk premium and payoff for challenging the inefficiencies has a negative expected value.

Yet there is no shortage of people starting new companies and the trend over time has been toward more of that, not less.

I would dispute that claim. Business and organizations have never been larger, more powerful, more wealthy, or more politically connected. Small business has been shrinking drastically for generations now all across the globe. Especially outside of tech. But even in the tech world how many of the workers are operating primarily under the direct employment or contract of some 50,000+ employee company along with thousands of other contractors? And how many 20 person tech businesses have been operating consistently for 15 years?

> Small business has been shrinking drastically for generations now all across the globe. Especially outside of tech.

I am not saying it is not true but it would be good to have some data about this. Cafes, bakeries, small restaurants, lawyer offices, flower shops are all small businesses, a lot of them run by 1 or 2 people.

I guess it depends what we consider a small business.

Yup, just like democracy, free market systems are bad.

It's just that everything else is worse...

Indeed. And these things:

> the justification that a good one is well worth the price.

that's just what they (the execs in bigger corps) say to fool the employees, make them shut up. Or to look good in the press?

Market theories don't claim everyone makes efficient decisions just that over time, people tend to pay for their inefficiencies. In contrast, systems based on status, family lineage, etc, provide little to no natural force against similar inefficiencies.

The gap between the actual theories and the popular conception is what I’m commenting on.

Note that these theories are actually generally descriptive, no one wholesale invented capitalism. For the entirety of human history we have had systems based on a combination of markets, status, family lineage, etc. this applies both to the past and to today.

What I’m taking issue with is the degree to which all of that is glossed over and people assume that the market will evolve naturally if left unspoiled/untouched.

There are plenty of market theories that claim that in the long run decisions will converge towards an optimum.

In practice, this is a tautology. People pay for inefficiencies, but inefficiencies are defined as what lose money. You didn't say anything, you just diluted a (wrong) theory to make it correct and as a result don't have a theory anymore, just a rhetorical trick.

> There are plenty of market theories that claim that in the long run decisions will converge towards an optimum.

Do you have an example of an economist making that argument, outside of theoretical modeling?

I don't see the tautology. One person in a leadership position may value certain things and be willing to lose money on them. The cost gives their peers and supervisors at least one reason to question that practice.

The tautology is that business inefficiencies are costs, either future, current, or comparative. Saying that inefficiencies will be punished in the long term is tautological, you're just restating the definition business inefficiencies.

As far as economists making that argument, take a look at the strong and semi-strong EMH. Plenty of economists agree with the semi-strong version.

If a CEO or other C-level sets some targets, then you’d think they would be held accountable for missing them. But from what I’ve seen, this is very rare. So the board is just as responsible for what happens as the CEO.

I have seen cases where the board holds executives accountable, and that results in a better company lead by competent executives. But that kind of accountability is unusual in small companies because the board and executives are often one and the same group.

If there’s anything I’ve learned over my career it’s that the theoretical structure of a company has no inherent relationship to reality. If the CEO, chairman and board members are all mates then they will pat each other on the back until well after the iceberg has ripped a hole in the side of the ship.

It expands beyond just one company’s corporate leadership once you have members who are on multiple boards.

https://en.m.wikipedia.org/wiki/Interlocking_directorate

This also makes it so that they care less about any one particular company failing when they decide to hand out a leadership position to an incompetent buddy

C suite comp is largely stock, so they are held accountable financially, their compensation literally rises or falls directly with the company's value.

Well, that's the theory. There is normally a cash component, and I guess that's how they make their living.

> 2. There's no good objective way to measure C-level performance.

> On top of that, the best person for a given CXO job often just so happens to be a golfing buddy and/or have outside business dealings with half the board.

> C-level hiring market [isn't] some sort of efficient meritocracy

Those 3 things aren't contradictory, they each follow from the other. In absence of an objective way to measure performance, the best thing is "I have experience with this person, and can vouch that they're good." And so it totally makes sense that this sort of network-based hiring is what we see instead of a meritocracy.

It’s game theory and asymmetric information at its finest. Throw in a healthy dose of survivorship bias, a pinch of appeal to authority, and you get a perfect recipe for astronomical out of whack compensation packages.

I am convinced that we need to move companies from effective hierarchical dictatorships to more democratic institutions. A CxO should be like an elected politician - representing some manifesto that is a coherent (!) package of measures and gets appointed maybe by an election amount employees / shareholders.

As such they need to persuade a majority of people who will supply the (human / financial) capital that their manifesto is the best option. They essential earn their way into the office.

Edit: I am also semi convinced that the hierarchical thing is half the problem. Having a single person make "the hard decisions" is usually a way to have the wrong decision made about 50% of the time. Somehow humanity has found science as good means of improving those odds. But for the sort of decisions we make in business (very little hard science) then I suspect democratic consensus might be a much better way to get a good decision.

(no this is not about decision by committee.)

I've seen this in a startup that grew to around 500 people, and it wasn't pretty. The office is full enough of politics as is, and it only gets worse when you have to campaign for your job.

Hiring externally side steps all of that, and can bring a fresh perspective.

You do have to admire the staggering idealism of suggesting that office politics could be fixed by turning it into real politics, though. ;)

You cannot fix it but you can at least stop pretending and make it transparent :-(

In this case, it is made more transparent by amplifying all of the worst aspects of it.

So, I know my initial comment above was pretty snarky. My follow-up reply here will probably sound a bit argumentative. For what it's worth, I mean to engage genuinely in the below comment, and try to offer a little bit of whatever wisdom I've managed to acquire -- so that maybe your :-( can turn into a :-) as you engage with office politics.

I would put to you that it already is quite transparent -- to folks who know how to speak the language. Look closely at who is speaking, what is being said, and (perhaps most importantly) what isn't being said. Power in a corporation is measured in information and resources. So, a simple definition of office politics could be: the art of influencing the flow of information and resources.

If it doesn't feel transparent, the most obvious causes are (in rough dependency order): not being in the right rooms, not knowing what to listen for, or not knowing how to talk the talk.

Can I ask if this definition or mini-framework resonates for you? What have you tried to make things more transparent for yourself? How has it gone so far?

But that same argument was made in the real world of politics - I expect both Cardinal Richelieu and Talleyrand have quotations on it.

The point is not that there is a framework that advantages certain people (usually just being in the room requires certain advantages from birth) but that we should get rid of the framework and replace it with a new fairer one.

I have been in the rooms - and the people in them are not as smart as inciteful or as informed as many outside. We can do much better.

I will keep my idealism as it warms me during the long dark winter of selfishness

This makes sense in theory, but seems insanely weird in practice.

1. I start a company. It’s just me. Obviously, I lead the company.

2. It’s successful!

3. I hire two more people to help with some of the low-hanging fruit that I don’t have as much time for.

4. Do I need to be careful now so that they don’t just conspire against me, elect one of themselves to “run the company” and just take the assets and run?

Or is this too small of a company for this to make sense? Do we make it law for companies with more than 500 employees? So most companies will stay at 499 employees for as long as possible?

How does make sense in theory? They’ve just reinvented partnerships or cooperatives, which have not exactly outcompeted corporations despite long having had enough time to do so.

Co-ops have actually been having a pretty big uptrend in both popularity and market share the last decade. I wouldn't discount them so much.

You run it like a co-op and get a stake in the company no matter how your position or job changes. And you can leave and sell off your stake when you want.

> 4. Do I need to be careful now so that they don’t just conspire against me, elect one of themselves to “run the company” and just take the assets and run?

If your company was structured as a co-op, yes. Of course you'd probably make them buy in at a certain level, or else their ownership would be lower than yours by enough that they wouldn't be able to vote you down (or at least not until their share vests several years down the line). But fundamentally you should have some skin in the game; they're putting their time and effort into the company too, you owe it to them not to fuck it up and they deserve to be able to replace you if you go off the rails.

> Or is this too small of a company for this to make sense? Do we make it law for companies with more than 500 employees? So most companies will stay at 499 employees for as long as possible?

We don't need to mandate the co-op model, just allow it to compete and let the best model win. Tweaks to antitrust enforcement, tax treatment, and securities laws would be a good way to level the playing field. IMO it's past time to start pulling back on limited liability too (which was meant to be something granted to corporations that promised significant public benefits, not something everyone gets by default).

Frankly we're already starting to see a rise in co-ops; traditionally they found it a lot harder to raise capital than traditional corporations, but nowadays there's a lot of capital sloshing around at the same time that cheaper communication, outsourcing and SAAS means lots of businesses (especially in tech) can be run in a more capital-light fashion than ever before. And who knows, maybe the CEO-as-dictator model will still win out. But we should let them fight on a level playing field so that the best model wins on its merits.

Agreed completely. And perhaps it helps to think of the "invested value" of the company as a form of financial and human capital invested so far - when you hire those two people you have invested maybe a year of work. A year later you have invested two years, and so have they!

If you were all panning for gold (not terrible analogy for searching product market fit) then while you share the gold, you have doubled your chances

> If your company was structured as a co-op, yes. Of course you'd probably make them buy in at a certain level, or else their ownership would be lower than yours by enough that they wouldn't be able to vote you down (or at least not until their share vests several years down the line). But fundamentally you should have some skin in the game; they're putting their time and effort into the company too, you owe it to them not to fuck it up and they deserve to be able to replace you if you go off the rails.

Hang on, this sounds just like a C corp with shares that employees are required to buy. No?

See the other thread about humans taking too long to make decisions between roughly equal options.

Requiring consensus for business decisions is a guarantee of slow decisions. With a good process, you can make the easy decisions in a timely manner, but the hard decisions will still take a long time, and there's going to be a lot more effort spent on coming to decisions.

You kind of said it by accident here:

> I am convinced that we need to move companies from effective hierarchical dictatorships to more democratic institutions.

You want to move from effective leadership to something else. ;p

It's much better, IMHO, to work towards making sure decisions can be made quickly and reconsidered if necessary, than to try to make sure decisions are made correctly at the cost of finding consensus.

None of which needs to be undemocratic.

Set time limits on decisions and revisit under certain circumstances.

I bet there is / will be a lot of fertile ground for research

Frankly just being transparent about such decision making will almost certainly put that company in the top quartile for good decision making - most large companies make many decisions - and anecdotally make them badly

The org chart is hierarchical but large companies don’t run on the org chart in practice. Executives do need to sell their vision into the org, even their own direct reporting division. There are millions of ways for staff to subtly or not so subtly sabotage executive plans.

The ability to succeed at aligning and motivating staff is one of the big differentiators between an effective C-level leader and an over-promoted manager. An effective C leader does need public leadership skills similar to a politician’s.

As does Putin or Xi. And they are good at it. But that does not mean the people under them are free or able to influence resource allocation in a fair equal manner.

This is a bit of a weird take IMO -- CEOs already need to persuade most employees (human capital) and most investors (financial capital) that their manifesto is the best option, or the employees will quit and the investors will take their money elsewhere.

With some exceptions, no one is really forced to invest / remain employed as they might be in an actual dictatorship.

Observe the benevolent-dictator-for-life phenomenon in open source software -- I fully support democracy but it's not obvious to me that its benefits scale down (or perhaps transfer sideways) to corporations; if they did, wouldn't we see a lot more organizations structure this way? Most of government is already not organized around democratic norms, with one extreme being the military.

I'm curious -- what convinces you of the need for this shift?

Playing devil's advocate here.

Maybe being a golfing buddy does qualify for being a good CXO. To be a "golfing buddy", you need money and connections. Connections are important for that job, and wealth correlates with success and good finances, again important. Some of them are just born in wealthy families, but this is a positive, not a negative: wealthy family often give their kids good education, have lots of connections, and are used to being leaders. Golfing buddies also need to make good conversation, including on business topics, otherwise they won't stay buddies for long, again a valuable skill.

Being a golfing buddy certainly isn't an objective criteria, but it is not completely worthless, and it is easier to detect fakers when you spend a lot of time with them, or at least, it requires more effort from the faker. Objective criteria typically include past work, and CXOs usually have that too.

Maybe a good solution for CEOs in that situation is to be pretty clear about that - make the CxO role a purely "public face" role, and leave day to day operations to VP / SVPs.

In my experience that rarely happens, the "golfing buddy" types may be good at the golfing buddy stuff but also exert a lot of influence (often quite forcefully) on the overall org where their actions tend to be mostly negative.

In theory a good leader does exactly this. I once heard leadership defined as creating consensus. It is only when two VPs can’t make a decision does the good CxO step in to make a judgement call based on the arguments of all sides.

Even Steve Jobs talked about losing arguments at Apple and not getting his way. He hated it, but he recognized he maybe didn’t always know best and trusted people to make the right call if they could defend their rationale.

Too many leaders think their job is to be a decider, when it is really their job is to hire people they trust to make most decisions and then they make a few critical ones.

A unrelated item from the department of bad ideas that might be good ideas:

(Horns on)

Maybe voter ID laws aren't such a bad idea. Getting an ID and presenting it is like a "bare minimum" litmus test for whether or not you can comprehend and navigate government bureaucracy. If you can't comprehend and navigate the simplest form of it, how could you be qualified to make decisions on it?

(Horns off)

An unfortunate side effect of both these is that they keep one group in and everyone else locked out.

Unfortunate side effects turn into strategic opportunities which turn into repressive regimes rather organically.

> If you can't comprehend and navigate the simplest form of it, how could you be qualified to make decisions on it?

Surely it's the reverse? People who are poorly served by existing government bureaucracy are those who most need to have input into the running of that bureaucracy.

There is a history into the 2020s of blacks excluded from golf country clubs (most private clubs are exempt from discrimination laws). I believe the PGA didn't stop holding events at whites-only country clubs until 1990.

It's also pretty hard to measure the performance of software engineers at the senior level. When hiring, I don't feel like it's wrong to encourage good software engineers to refer former colleagues they think are good.

I don't see why that would be wrong for C-level executive jobs either. It's really the same thing -- trusting the opinion of people you know and think are good is a better bet than drinking from a fire hose of job applicants of widely varying quality.

At any job where your purpose is "leadership" and "impact" it is difficult to quantify success. People have tried to measure with things like OKRs, but ultimately a lot of what successful senior people bring to the table is hard to measure.

One measure of a high-quality C-level performer is the quality of their teams. The best C-level people can bring in very high-quality managers and individual contributors underneath them. Below average C-level people really struggle on this front.

Also, for some C-level roles there are good and objective ways to measure performance. For example, for a Chief Revenue Officer you have (obviously) revenue. There are a ton of confounding variables of course but in general CROs who consistently out-perform plan are better than those who consistently under-perform plan.

I've definitely seen CEOs with enormous amounts of success (in the companies they led previously) bring in dogshit teams to their current company. I've also seen dogshit CEOs bring in amazing people.

My theory about the giant comp packages:

1. The board is constantly dealing with the CEO, and CEOs are very good at taking credit for things regardless of their actual impact. So they create a subjective impression of being very important.

2. The CEO is only one person, so throwing (say) 1% of the company's profits at them seems like a great investment for all that stuff they're "doing".

If enough boards play this game, CEO pay is driven through the roof.

Almost like a kind of cartel? But about CXO salaries instead of prices of goods

I think it's about risk aversion and social proof. The CEO can usually persuade the board that they're important, and the board can easily pay them a lot, so why not do so, rather than risk them leaving? Once enough boards do that, it becomes the "going rate for CEOs" i.e. social proof / herding takes over.

Also, the aforementioned difficulty of measuring CEO performance perversely becomes an asset. When people don't know the quality of what they're buying, but they feel that quality is very important, they'll turn to any proxy (Harvard on resume, butt was in chair while previous company was doing well) and pay top dollar for that. You can't pay for quality, but it's extremely easy to pay for scarcity if you really want to.

It just comes back to... if you have a lot of money to spend, and the purchase might matter, you'll often be willing to spend a lot for the "best", even if there's no evidence or reason to believe the "best" is really of great value. I've seen this in my own behavior and that of my spouse (what if the most expensive preschool actually is the best one?)

I had an interview with an exec once that went like this:

"You will take the blame for all my failures. I will take credit for all your success."

Needless to say, I didn't get the job.

who spoke the quote?

VP of product management. You may not have heard of the company, but you likely know some of their products.

Did you want that job?

Not after that.

Most CEO compensation is equity which is directly tied to company performance.

If you look at Pfizer’s CEO who had a total comp of $24.3M of which his salary was $1.6M.

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