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We don’t adjust salary for what proportions people manage or are responsible for in a lot of other fields, at least not to the same extend. And especially if we would go by responsibility. I earn about 3 times as much as the average school teacher in my home town and about 4 times as much as the people driving the buses there while I sit in front of my screen and fix irrelevant css bugs or spin up the next semi-useful microservice for a cross financed project that nobody really cares about except and that doesn’t really help anybody. Their responsibility and utility is much greater than mine. If they fuck up it has much larger and potentially grave consequences. If I fuck up there will be a Jira ticket and a semi-interested PM who will assign it to me 3 weeks down the line. Furthermore this relation does not automatically imply fairness. And on the outside it also appears very asymmetric in personal risk. A megacorp CEO might tank the entire company and can often still walk away with millions. So if we wanted a “fairness” optimized solution then maybe it should take into account the public utility, difficulty of the job, amount of work required and personal risk. And maybe, (just maybe) we don’t need anyone being arbitrarily wealthy and having more assets than some developing countries.

I think it is a misunderstanding that the job market is optimizing for fairness: it is not.

Executive pay is supply and demand. The mayor is being paid $450k because a person with the necessary skills was willing to take that salary (after fighting off opponents) to become mayor. Mayor comes with prestige, so more people want to be mayor, and $450k is not a terrible incentive to go after. If the government paid $80k a year, no one would become mayor. If they paid $1m a year, too many qualified people might be interested, or – the right people might become interested.

Imagine you’re a CEO who successfully ran and sold a business for $250m. You now have at least $25m. Why would you ever want to work an intense job again? Being CEO is exhausting.

Executives are paid a lot of money because they’ve already made a lot of money: if you want to incentivize them there has to actually be something at stake.

That said, these decisions are usually made by a board, which is small and has limited knowledge.

There is plenty of room for them to miscalibrate, too, but paying too much for an executive is bad business. Paying too little is, too.

> That said, these decisions are usually made by a board, which is small and has limited knowledge.

The board is usually made up of other executives or former executives. This group sets each others salaries unlike all other professional categories.

As far as I can tell, CEO remunerations are determined by "the going rate"; and the directors on the remuneration committee are fine with that, because they're also CEOs for some other firm, or hope to be. So the going rate goes up, up, up.

Now, here in the UK, the remuneration of University heads (Principal, Master, Dean, or whatever title) are having their pay determined by the going rate for CEOs. These are people who do the job for a couple of days a week; they aren't exactly struggling to get on top of the workload. Same for the bosses of the jungle of pseudo-companies that make up the modern NHS; they're all basically employed by the taxpayer. They've employed so many managers that their organizations are hopelessly top-heavy, and yet they need huge remuneration.

Can they not delegate? I thought the ability to delegate was an essential skill for any manager.

I should have been more clear on what I mean: I am well aware that the job market is not optimizing for fairness but that is what people often judge situations on.

I do understand how it came to all of this and how the situation is justified but just posed that if we turned our back to completely free markets and imagined a structure based on "fairness" then things should probably be different.

Furthermore I disagree with the argument that nobody would want to work an intense job while being "underpaid". Plenty of labor is really intense and pays minimum wage or barely over.

If executive pay is supply and demand, and has risen stratospherically over the past 40 years, why has the supply of executives failed to meet demand for them? Are we not sending enough people to MBA school? Is there a funnel problem in our educational system? Do we need to open up more opportunities for skilled immigrants to work here in executive roles?

The US has terrible cost disease in a lot of industries, and I would lump executive compensation in with those industries.

I don’t think I’ve seen a good coherent theory for this specifically

> If the government paid $80k a year, no one would become mayor.

I very much doubt this. New Hampshire legislators get $100/year, since 1889. Still plenty interested in the job.

Yeah, I would do public service for free, personally, but I have the means to.

It’s an interesting filter to pay nothing, for sure! At that point, it is filtering for people who can afford their own lifestyles without a job

> CEO salaries should be understood in relationship to the resources that they control.

Why? In every other case we’re told wages are set by how much it takes to get someone who can do the job to accept the position. What the company gets out of that person’s work sets a cap on potential compensation, but doesn’t set the actual amount paid.

Because understanding CEO pay as a product of organization incentives shows just how futile shaming companies into lower CEO pay is. Just tax the CEOs more and let companies pay what they want.

> If you’re on the board of an organization like that, settling for a second-best CEO to save a 7-figure sum just doesn’t make sense.

The idea that boards can effectively determine between first-best and second-best just doesn't make sense to me. Ranking job candidates is hard enough in much simpler circumstances.

I have no illusions that they succeed, I can just tell you that they have a strong incentive to not price discriminate.

>But our mayor oversees thousands of employees

Chances are they engage with much less and obviously don't have interactions with thousands of people and are keeping all of that straight in their head, so this is not a good reason.

You don't get credit because you oversaw a public worker whom you've never engaged with.

>makes decisions that influence hundreds of millions of dollars of spending

They also have access to (sometimes) smart people to filter through information and distill it down for them which is honestly the hardest part, not the decision making. It is unlikely they are compensated compared to the work they put in.

I'm not saying the job is easy, but they aren't doing it all themselves and the core problem is that the people underneath them are probably making no where near $450k. Salary just doesn't correlate to actual effort these days.

That said, $450k for a mayor is fine. Someone who can become a mayor can easily be a corporate executive making millions.

Curious to know, what threshold would not be fine and how did you get there? My point is that you’re implicitly using the same method most exec comp committees use to set CEO salaries.

Frankly, I think this sort of thinking is wrong almost all of the time. I understand why hiring boards feel they have no choice, but the reality is, outside of maybe 15 people from the past century, there are no clear number ones and number twos. Talent ranking just isn't that accurate. Pro sports has exactly the same problem. If you happen to actually get a LeBron James or Shohei Ohtani, then yeah, they absolutely deserve probably 50 times what they'll ever actually get paid. They're worth more than the rest of the team combined.

But if you don't have them, you're locking yourself into a supermax contract for Russell Westbrook or John Wall and scuttled your franchises hopes of winning for at least the next decade until you get the balls to suck it up and blow up the entire organization and admit you were wrong.

A tiny number of elite individuals are legitimately worth all the damn money in the world, but they're nearly impossible to identify in advance. But that promise sucks in the money men to pay these ridiculous salaries out of sheer hope that maybe they'll strike gold even though they almost never do. Hell, it's even worse in business because someone can just get lucky for a really long time. Market conditions you didn't even see coming might nonetheless make you look like a genius just for making a correct guess. At least in sports the winners are actually the best at what they do.

I completely agree that it’s a crap-shoot, but again from the perspective of a board they’d rather cover their bases and over pay. Especially when this compensation is a fractional percent of the company’s revenue.

The other factor is that when you’re on an exec search team, you just look at other executives in the same industry. There might only be 5-10 total that have similar qualifications and are in your comp range. The core issue is that power and relationships within a given industry are typically very concentrated so there’s a limited pool to draw from if you want an exec (and most boards do) who brings that.

I think in this context second-best CEO is euphemism for crook. Having those could be a multi-billion dollar liability.

This all may be true, but it doesn't change the fact that I have no interest in donating my money to an organization that is going to give a sizable chunk of it to some rich CEO rather than the people that I'm trying to donate to.

Even public money goes to such charities.

https://www.sfchronicle.com/sf/article/CEO-of-S-F-nonprofit-...

Sounds like some pretty solid market effects.

You’re donating to rwbj? Why? That’s dumb af. It’s like donating to IKEA because it’s owned by a non profit. It’s a business that has exploited a regulatory system.

The only reason you’d donate to this hospital or Harvard or any other such exploits is if you think it’ll get you something: earlier treatment, admissions for your kids and so on.

If you want that and you know the game and you want the CEO to be paid less I don’t know what to say.

The argument that this is simply the market rate required to attract a person with the required skills can be proven false in so many ways, for example:

1. It's not a market, there is no job advertisement for the CEO role that the general population can apply for. If there were, and if it were to offer a fraction of "market", there would still be thousands of applications, and the top 1% of those candidates would absolutely do the job as well or better than the typical hand-picked candidate.

2. There are several roles in society that place enormous responsibility on those professionals and that only a handful of people in the world can do well, yet those jobs still pay low 6figures max. For example, nuclear engineer, aerospace engineer, state leader, and yes, ironically, most public hospital directors.

The sad reality is that executive pay is simply a result of incentives and the fact that corporate hierarchy gets very thin at the top. It has no relation to the competence or direct value-added of the executive.

I don’t agree on your first point. I do think power and talent is highly consolidated among a small number of executives. Especially when you look at (as most boards do) executives within a specific industry vertical.

That’s not to say those people guarantee success, but it is less of a risk than picking someone unknown and without the established network and direct relevant experience.

Again all this to say I don’t think shaming companies into paying less will work, we should just tax CEOs more and let companies pay what they want.

> That may be a terrible decision, but it shows the extent of resources a CEO of a $6bn organization commands. This is one choice out of tens to hundreds of 8-figure choices that this “super manager” will make in a year.

This argument sounds a lot like it doesn't matter what decisions they make as long as they're in charge of a lot of capital.

> If you’re on the board of an organization like that, settling for a second-best CEO to save a 7-figure sum just doesn’t make sense.

If this is the only thing checking bad decisions, we have to consider that when there's a little oligarchy of buddies controlling an immense concentration of capital deciding each other's compensation, there are different market forces at work.

If we measure a leader's potential value by their potential impact/damage radius, then it follows that their actual pay should be proportional to the actual impact/damage they cause. The problem here is that leaders seem to be compensated in proportion to their impact, but not penalised in proportion to their damage, even when their success is indistinguishable from chance.

I agree with you. I’m not sure what the enforcement mechanism would be though. Boards suing CEOs more frequently over negligence? CEOs buying a certain amount of equity in a company before they join?

CEOs are highly leveraged. One wrong bet could cost the company/employees/shareholders more than a CEO (even a multi-millionaire) could repay.

In reality this leaves the board with recouping maybe a few million from the CEO on a shortfall that may be orders of magnitude bigger. I think pragmatically most boards just move on, let the CEO take the reputations hit, and focus on trying to find someone better.

>If you’re on the board of an organization like that, settling for a second-best CEO to save a 7-figure sum just doesn’t make sense.

You're falsely associating higher pay with performance, when oftentimes they can be inversely correlated.

https://www.wsj.com/public/resources/documents/CEOperformanc...

https://www.gsb.stanford.edu/insights/when-ceos-are-paid-bad...

https://www.epi.org/blog/ceo-pay-still-not-related-to-perfor...

I didn’t say anything about performance. What I said is that it’s untenable for a board to penny-pinch a few million dollars for someone managing orders of magnitude more in resources.

A board gains nothing from pointing to a 2005 Stanford GSB blog post if a CEO they hired runs the company into the ground.

Again, all this to say we should just tax CEOs more and let companies pay what they want.

>second-best

Your performance comment is right there. What else is "second-best" other than a comment on performance?

settling for a second-best CEO [..] doesn’t make sense

Is there any indication that the CEO was premier tier other than the size of his compensation package?

Odd, when I complain that my salary should be higher because of the impact the work I do makes, they don't raise my salary.

> This is one choice out of tens to hundreds of 8-figure choices that this “super manager” will make in a year.

I had heard the opposite — from Steve Jobs no less. It was an interview I believe (sorry, no source) where he said executives at the top maybe made 6 decisions a year.

For Jobs, to be sure, these decisions are like, "Apple is going to start a chain of retail stores".

I like to consider CEO salaries by the amount they’re getting paid, per employee in the company.

There was a bunch of complaining recently about GM CEO Mary Barra, whose annual compensation is around $30M. GM has around 167,000 employees, so this corresponds to about $180 per employee.

The average employee compensation at GM is around $100,000 per year.

I wonder, did each employee get more than $180 of value from Mary Barra’s leadership?

I like this as a more precise back-of-the napkin method than what I articulated. I’m not up-to-date with GM and Barra’s tenure.

What I can say is that I’ve personally seen bad leadership teams cost employees much more than $180/year. As a board, it’s hard to look at that prospect and and go cheap on someone with the potential to destroy or create that much wealth.

That's a great way to look at it as well.

We shouldn't have unelected individuals making choices that have such a high impact on society in the first place. You've detailed the mechanisms behind their high pay, but that is far from justifying it.

I think we should have withheld the theory of relativity because it eventually led to weapons of mass destruction. At least pending a vote of electing Einstein to be a scientist and a subsequent vote on publishing the theory.

The CEO is elected by the board and the board is elected by the shareholders.

> settling for a second-best CEO to save a 7-figure sum just doesn’t make sense.

Really? You expect the CEO to make all significant decisions, all on his own? No wonder you think the CEO of a billion-dollar company needs a 7-digit salary.

I think the main job of CEO is to appoint useful directors, and promote competent managers. That's certainly a challenging job; but it's a job you can learn, like any management job. I'd even agree that most people are unsuited to that work, as most people are unsuited to any kind of management.

But it doesn't call for some kind of superstar, a one-off snowflake "talent".

> But our mayor oversees thousands of employees and makes decisions that influence hundreds of millions of dollars of spending.

Right; arguably your Mayor might be worth $450K. I'd be upset about my representative being paid that much out of scarce public funds; but that's not even in the same ballpark as the going rate for the CEO of a billion-dollar company.

I’m engaging in good faith, no need for ad-homonyms.

No, I do not expect a CEO to make those decisions on their own. They also usually bring a team (or make choices about who to keep/remove). So even if they’re not deciding directly, they’re only a step or two removed. Many of the multi-million dollar bets being placed might just be on who to hire to make a decision and execute.

Incidentally, those key hires are often why CEOs command such a price. Their price simply reflects that power in human networks is highly consolidated. CEOs absolutely leverage their position as gatekeepers here.

All this to say why I don’t think we’ll be successful in curbing CEO pay, and should instead just focus on taxation.

No "ad-homonym" (I like that version!) I didn't attack you, I critiqued your remarks (you can tell, because I cited them).

There is an ongoing scam that pushes C-suite pay ever higher, and it needs to stop.

It builds on exactly the reasoning you lay out, and goes something like this:

- "We need the best CEO we can find. We have to understand how to set compensation to attract them."

- So the board hires an executive compensation consultant.

- "If you want better than average, you have to pay above average." So they target something like 85th percentile compensation for their market.

- No board goes into an executive search saying "We want a mediocre CEO, so we'll pay below market." Over time, executive compensation ratchets upwards everywhere. <- YOU ARE HERE

Did you not see my point about taxation?

I did. That's ridiculous. A classic example of attempting to divert blame while saying, "don't like it? Make me stop."

But perhaps I'm wrong; if a similar confluence of policy and supply conspired to enable a similar scam that pushed programmer compensation ever upwards, would you say that the proper solution to that problem would also be tax policy?

> Shaming organizations into lowering exec comp probably won’t work: there’s a strong economic incentive to pay competitively.

Well I think you're right on the first half but I don't think you're correct on the second half.

Paying a CEO 5M vs 17M is a rounding error to a double-digit billion dollar company. Its like getting something on Amazon instead of Alibaba, sure Amazon is 3x the price but you obviously find the item cheap enough otherwise you'd be on Alibaba. Or perhaps you want the item now and don't want to spend months searching for a new CEO.

I’m not sure I understand you, I believe we’re making the same point? I mean that there’s a strong incentive to offer competitive pay (as in pay more e.g. to poach from a competing company).

Yeah, I guess you're right. The CEO has the retention/switching costs amortized in their salary unlike probably the entire rest of the company.

A company might take a 30k hit letting a 50k/yr employee walk away but they won't raise their salary to 56k to keep them from walking. But w.r.t. a CEO they will raise their salary from of 5M to 17M so that investor confidence won't tumble by them quitting.

I’m glad you used the travel nurse example because it shows why the comp is so high:

The board has to guarantee above all else that the CEO is aligned to serving the board and shareholders above all others ESPECIALLY their employees

So every CEO is just stating what their soul is worth.

I mean I guess it’s good that it’s so high because psychopaths that can perform at that level without fucking over their masters or being unpredictable are rare.

What shareholders? This article is about nonprofits.

Wasn't there analysis that company performance is inversely correlated to CEO compensation?

I remember seeing a chart, though I don't remember whether the analysis was well done & researched or not

I have not seen it but, to me, it kind of makes sense if you put an average overall.

I think companies making a lot of money are in a world of trouble: sweet trouble, to be sure, but still trouble.

Sustaining the same percentage growth is incredibly difficult once you are big. So, what is there to do? Expand to new markets, create new products with the potential to destroy your existing ones, fire people you think are no longer needed? Decisions that will either make more money or destroy the company. And, no matter what anyone else would say, I think their decisions are worse than half chance.

In the end we praise the CEOs that made the "right" choice. But it was the right choice only in hindsight, it could easily have gone in the other direction, as many many examples of previously successful CEOs have shown.

Nobody stays on top forever and that's just how it is.

Now, as for the CEOs' salaries: they are the same regardless of their successful choices. So, when you average it out, it would look like it is inversely proportional, simply because more companies tank than stay on top.

> CEO salaries should be understood in relationship to the resources that they control

Why?

Because it’s useful to understand the incentives driving higher exec pay. My point is that shaming organizations into reducing CEO pay is unlikely to work given the incentives, so we should just focus on individual progressive taxation and let companies pay what they want.