What's missing with American CEOs?
albertcory50.substack.com
albertcory50.substack.com
1. Stock options aren't long-term enough – a CEO can make a series of decisions which increase profits and therefore increase stock price in the short-term, but completely hamstring the long-term viability of a company. Doesn't matter though, the CEO already made their bag and moved on.
2. Even when the chickens come home to roost when the CEO is still there, the market is not properly punishing underperforming CEOs. For whatever reason (I have a number of theories), a CEO can do an objectively poor job, leave their current position, and then somehow end up at a different company in a similar position of power not long after. You have to do a really, truly terrible job and even then you might not be out (just look at Adam Neumann).
3. Comp is so high these days (because the multinational corps have gotten so big even when the number of CEOs per company mostly has remained at 1) that even if you do somehow (a) torpedo your stock options and (b) become unemployable, you were probably making enough that you can live out your days very comfortably if necessary.
CEO is largely a figurehead position. Boards know quite well that CEOs aren’t the clock maker toiling away at creating perfection. They have very talented senior staff, middle managers and individual contributors that actually make it happen.
However, boards know the market doesn’t give a flying shit about those people. Boards know that CEOs carry a certain political weight in their very presence, and so they have to make their comp packages as attractive as possible so they have the best chance at attracting the best CEOs, because if they do, they know the market will respond positively. If a good CEO sees Company X sending their poor performing leader packing without a golden parachute, there’s no way he’s going to go there. If the market sees the same thing, they’re going to think the same thing.
It’s all one big emperors new clothes bullshit show.
You want a board to behave like the first scenario, but it's usually the second scenario you are in. As the game repeats that translates to higher comp to the ceo and to the board (since the ceo recommends his buddies deserve more comp) and the board basically tries to side with the ceo as far as it can without incurring personal legal liability and as long as that ceo doesn't underperform in a way that is publicly embarassing they can often hold on for several years and make out with millions while the board gets decent comp for almost no work.
I don't think you can easily fix this but I do notice that many of these companies are pretty clearly oligopolists under the pre-rehnquist definition so the solution could take the form of breaking these large companies up until the smaller companies do end up with a share holding block that both cares and is big enough to discipline the board and ceo.
Let's say you are on the board of Apple and you are looking at Tim Cook's retirement. Would you look at a Senior VP from Microsoft? An Associate COO of Intel? The former CTO of Ford Motors? A department head at Via? Ryan Reynolds? The CFO of Apple? The person who was Jim Keller's coworker at Harris and DEC, and worked two levels below Jim Keller at AMD and SiByte?
Can you or anybody put in writing what qualities a prospective CEO of Apple should possess that would differentiate one of these candidates above the others? Let's say you are Al Gore or Al Gorsky. How do you decide who to hire?
- Nepotism / boy's club – everybody is kinda friends / in the same circle. Once you get in, you're mostly in for life.
- Modern financial instruments allow the smartest person in the room (i.e. hedge funds, etc) to make money on either side of the inflection point. Doesn't matter if a bad CEO tanks the stock price if you expected that to happen and are the one with puts while the rubes (retail investors) are holding the dwindling stock.
Do you disagree with this thesis?
What exactly is risk to you? Losing a hand if the company does poorly?
That's not going to happen with the first example from the article:
> Fiorina received a larger signing offer than any of her predecessors, including: US$65 million in restricted stock to compensate her for the Lucent stock and options she left behind, a US$3 million signing bonus, a US$1 million annual salary (plus a US$1.25–US$3.75 million annual bonus), US$36,000 in mortgage assistance, a relocation allowance, and permission (and encouragement) to use company planes for personal affairs.
CEO pushes though decision on a monetisation plan so stupid that people are screaming internally about it before it's released.
The changes in question destroy the brand's reputation and decades of goodwill.
Many customers actively port their games away.
It's characteristic of short term thinking. The only concern is "what might raise revenue this quarter". If they'd thought beyond that they'd have seen that the damage to the brand is likely to be far more costly.
This line of thinking seems to have become pervasive. No thought is given to producing something people want to pay for. Instead, they squeeze until people get fed up and the product dies.
Edit: not your theory, but the commenter I was replying to above.
Good job by them, they managed to set the industry back 10 years, and got rich doing so.
But basically agree that, yes, CEOs don't have skin in the game. In fact almost everyone in big corporations doesn't. It seems to become more about not taking risks that would be socially embarrassing than about doing a good job.
But what could give them "skin"? Maybe fierce competition? But that's kinda lame. With efficiency gains from technology we should be able to live in a world that's not based around fierce competition.
Better than that is fierce accountability. From who? Everyone you can think of. In particular, accountability that they do their jobs right, make the right choices, charge fair prices, treat employees well, treat society and the earth well, etc.
If you think about it... there is no reason in principle that corporations ought to be secretive. Since they should be competing on "honest work", not on tricking and one-upping each other, it seems to me that they should be entirely open and judged for their daily behavior.
The trick, of course, is giving that accountability any teeth.
The comparison of CEO vs Owner/Founder/Guy with the name on the company, should be looked from the short/long term benefits to the company. A lot of CEOs are compensated based on stock value and quarterly results, which can be gamed quite easily. You can improve profit margins if you fire half your staff, but will that ensure your company lasts a decade? Probably not. Once you take a long term view, you can align the incentives that way, and automatically ensure the CEOs have more skin in the game. E.g. instead of $3M joining bonus, move it to a bonus if you’re still a CEO after 3 years.
they bury their own lede at the end but they elaborate on it:
> Shame as "Skin"
Japan is (in)famous for this. Honestly, read this section yourself, it's a very interesting (but IMO, not necessarily "productive") way to conduct business via aggressive risk-aversion.
>Stigma as "Skin"
used Germany as an example, but it's the dead obvious solution. If you screwed up, of course you should be less trusted in future endeavors. Especially if you were doing illegal stuff.
>Money as “Skin”
the more ideological solution that's more of a daydream than any real system.
- CEO pays part of their net worth to the company and should earn it back via success - Salary is capped at X times the lowest paid employee - no Golden Parachute if you burn the company to the ground.
>Better than that is fierce accountability. From who? Everyone you can think of. In particular, accountability that they do their jobs right, make the right choices, charge fair prices, treat employees well, treat society and the earth well, etc.
honestly, getting the mass public to care about these factors feels more ideological than the "Money as skin" solution. Government regulations are about as close as we get. we're still a ways off from that, though.
Anyway, any form of accountability that takes the form of "the person hopefully acts better" is not scalable. The only thing that is sustainable is a system by which the external world can hold the person accountable, by something approximating force: either the ability to compel them to change their behavior, evict them from the enterprise, garnish their profits, or arrest them.
To be fair it does scale in other societies. I think the question we should be asking isn't "why does it work there" and instead "why DOESN'T it work in the US?".
Maybe it's just because the US economy has been strong for some 80 years and the individualistic culture used that position to invest in any and everything that could possibly be "the next big thing". Ideas (and clout) over anything else.
Some of my most "entertaining" work experiences have been a direct result of this. In the latest example, the son of the founder went so far as to create a motorcycle dealership on the property of his completely unrelated inherited business in the parking lot of their HQ location because he was more interested in motorcycles than the business he inherited. This is a relatively small family company ($250MM/year net) that also has multiple private jets for the C-Suite of friends of the inheritor to ride around in. One of the most moral crushing experiences is when everyone sees the direction a company is taking, but we all still go through the steps we all know will be futile regardless because the money all spends the same in the end.
There absolutely are. "Shirtsleeves to shirtsleeves in three generations" is an old saying about how the kids ruin it.
Can you find us some stories of NON-family companies that have lasted more than 200 years? I've looked into this, and there are a couple. But virtually all the very old companies are family-run.
That's begging the question, literally. You're assuming something that guarantees your side of the argument.
There is no reason why a company has to become a multinational conglomerate.
Marginal reality of risk.
Big shot CEO’s bad outcome if they get fired for doing a terrible job is they are still rich. Assuming they’re not outright criminals, and also happen to get caught and punished for that, anyway.
Is Musk doomed to get whatever normal 9-5 job he can land if things go so horribly with his investments and endeavors that he loses everything? No. No matter what, he’ll never again work a real job if he doesn’t want to. His fame/infamy is bankable enough he’ll never need a real job to make decent money. He’ll live well and his kids will go to fancy prep schools and all that. His worst likely case (short of, like, going to prison—talking pure risk to his finances) is better than the best likely outcome for nearly everyone else in the world.
The marginal reality of risk, above a certain level, approaches zero. The numbers are big, but the risk is a fantasy. The average poor immigrant is taking more real risk than any of these people do, sometimes in their whole lives, every day. Even the average pampered software developer does.
Pilots have skin in the game. There is rarely any doubt that their priority is landing that plane safely. Now imagine a world where airline pilots are able to safely eject with a golden parachute and minimal damage to their professional reputation. What are the chances of achieving the same safety record?
There are far more successful CEO run corporations compared to family run corporations. Satya Nadella has been instrumental in Microsoft’s resurgence, but it’s very possible that Satya could have done a bad job, got a fat severance, write books and joined other company boards instead. Would you have gotten better work from Satya, if you could threaten to publicly humiliate him if he failed? I predict not. In fact this article tries to create a simple rule for a problem that has plagued humanity since its existence and will continue plaguing humanity. This is of course the problem of choosing a good leader for a company. A good leader will lead the company well, a bad leader will drive it to the ground and then save his skin when he has to. Of course you can try encouraging bad leaders to be good by forcing them to have skin in the game, but you’re better off just finding a good CEO instead. Determining whether a candidate will be a good CEO is a matter of judgement and cannot be algorithmically solved unfortunately. This is where the quality of a company’s board is important, a low quality board will be unable to even find the person that can right a sinking ship
But to tread new ground: not really. Firing is scary for a regular employee because they need to work to live, pay off debts, potentially care for family, and more. Many can't just take off a year without these finances without losing some of these factors. For many still, even a few months of no income can have heavy impacts, especially if we step outside our HN tech bubble.
A quick google tells me that the median CEO makes 20 million a year. they really don't need to work a day in their lives after a mere year or 2 of work. All the above financial factors simply aren't a thing unless their quality of life is insanely lavish (like, a full time crew managing a yatch lavish). What's more, their severance is again, usually in the millions. they get rewarded for failing more money than your average worker will make in their career.
I don't have an answer (none of the answers in the article are particularly good), but we can start by snipping those parachutes out of contracts. Severance's goal is to minimize financial impact to employees when a company downsizes. your average CEO does not have financial impact that a middle class worker would take any sympathies toward.
What a damn lie. The median CEO pay in the USA is $189,520, according to the Bureau of Labor Statistics [1].
$20 million is median pay for CEOs of S&P 500 companies, the biggest companies in the country…I wonder why people let themselves get suckered by clickbait.
1- https://www.bls.gov/ooh/management/top-executives.htm#:~:tex....
to come at a comprimise instead of calling everyone liars over statistics with differing definitions: Salary.com lists a median of $830k. Not quite "retire in 2 years" money, but well past middle class and more than enough to establish your own safety net. My main point doesn't change here.
https://www.salary.com/research/salary/benchmark/chief-execu...
With such traits potential punishments will not work great (they will just think "it will never happen to me"), hence it is why I think rewards are used more, but mostly as a form of measuring "success". After couple of millions it is not really about the money but about being more "successful" than the others.
Something like a wage floor means that success benefits all workers who can then rise up there or in future ventures. And if it crashes the employees benefitted somewhat from the peak as opposed to today where even an inflation based raised isn't guaranteed. That can also be done with minimum wage laws, but this is a way to keep the hyper successful in check without necessarily impacting smaller business who can legitimately only offer the bare minimum.
No, there are not, if we look at survival (the entire point of Skin in the Game).
Find us some examples of non-family-run corporations more than 200 years old.
So the question still stands.
An alternate approach would be regulation: outlawing outsized compensation. If the top dog really did only earn 50x the janitor's salary, we could eliminate an entire class of parasite.
A third approach would require cultural change. Regard managers as necessary but low-status. The people doing the actual work of the company should be held in higher regard - and earn more - than the paper shufflers.
What the author proposed and explored was a mandatory investment the compony you work for. E.g there are no employees at all just shareholders, and the minimum share you can have is regulated, thus limiting the size and structure of any organization.
To be “employed” you have to buy into the company. Since you have advance automation in the universe of the books it seemed actually possible.
All fascinating ideas, their implications, upsides and downsides were explored in the trilogy.
And I’ve wondered since, can this be a solution to a lot of our current woes, with automation looming as a potential societal issue as well?
Through congress? There's nothing in the constitution against wages at all.
>What if the equity ends up being worth more than that? If you solve that by not paying in equity, but only cash, now you have an even bigger incentive alignment problem.
These people spend years undermining the working class and finding all sort of financial loopholes, I'm sure they can take non-cash benefits into account when drafting such a law. I don't think they will actually do so, but it's far from the realm of impossibility.
e.g. for equity: you set a similar cap on RSUs and require all full time employees to get a certain amount. a CEO can hold no more than X times the amount of RSUs as your lowest paid employee and a portion of gains in RSUs are pooled into some other system to distribute per year as an end of year bonus (remember when that was the norm?).
It's not perfect and I see two obvious holes here (contractors and part time workers), but this is from 5 minutes of brainstorming from a non-economics expert.
Sometimes, the incentives from "skin in the game" lead to perverse business decisions. Want to drive a stock price up? Fire 50% of the employees and show that your earnings per employee increased 75%. Nevermind that those numbers indicate that your earnings decreased dramatically. Your _profit_ increased substantially in the first six months after the layoffs. The value of the CEO's shares goes up, and the skin they have in the game makes them a lot of money. The stock doesn't correct as quickly as CEOs come and go. Even in the example of HP's big one-day jump after Fiorina left.
As for family run businesses, most of the the TV references were over my head. I haven't watched any of those shows. But I can offer an age-old story I am familiar with. It often goes by the name of "The Prodigal Son". It defies almost all of the author's reasoning.
There is some idea that nobody getting paid $200,000/year could possibly be qualified to run a $billion company. There are plenty of people making less than that who think they are qualified. But they've never done it. To reach the top you have to work through multiple levels of management. Each of those levels comes with a pay bump. So you make $80K, then $120K, then $180K, then $300K before you can even be considered for the $800K job. This leads to the obvious miscalculation that anybody who has made $800K in the past is a qualified exec. Even assuming that a person was a competent manager at the $180K level or the $400K level, you still have to recognize how often the Peter Principle holds true.
The basic concept of Taleb's Empirica fund was to buy cheap options that were way out of the money in hopes of a "black swan" event. Most of those options expired un-exercised. So the fund lost money most years, but made huge profits in a market crash year. The big question is whether this is a net win over a few business cycles.
It’s like learning a great writer of crime novels is actually a housewife from Missouri - a great imagination, but all of their ideas come from TV.
It's about tying criminal responsibility to the CEO and the board. When the company commits a crime, the corporation doesn't go to jail. Instead the corporation pays a fine.
Thus in this sense the company barely loses anything and the CEO and board typically doesn't lose much.
I say fuck that. Throw the CEO or the board into jail. That will end some of the criminal negligence we see from corporations today. You do shit like this, you associate acts of evil, acts of crime with the names of board members and CEO's you will fix a lot of shit. A lot.
This is why traders/bankers who have lost fortunes (even fraudulently) usually land on their feet.
For every CEO or professional manager who didn't have "skin in the game" and failed there a probably 100's of incompetent children who drive a family business into the ground and manager owned businesses working at subsistance levels.
If I have a choice between a ceo who’s run 5 companies and 4 of them well vs one that’s run 5 companies and 1 of them well, I don’t really want the one who’s “learned a lot.”
Sure, but the likelyhood is that you'll have candidates that have a few senior positions and been CEO once or twice before. In that case one that's failed building a new company/product is no worse than someone that has been the CEO of an established company for a few years and it hasn't gone bust.
EDIT: I didn't mean to say that a failed CEO was better than a successful one - just that being a failed CEO won't bar you from being employed again, for good reason.
And he executed hundreds of capable officers in the 1930s, replacing them with incompetent yes-men, which greatly degraded Soviet defences.
In Western corporate terms, Stalin would be a boss who carried out mass layoffs of his most competent employees, ignored the threat of a competitor, and only survived due to the hard work and sacrifice of his remaining underlings, while taking credit for their work. All in all, he'd probably be quite a good modern American CEO.
And for those investors who took the biggest risks and demanded the most growth and boldness, the tech venture capitalists (who endorsed crazy growth strategies and paid valuations everyone else thought were insane), there have been tremendous rewards.
VCs are pretty open about wanting to back 50 companies and knowing that 45 will go to zero, 5 will make a bit of money, and 1 will make so much money as to make the rest forgettable. But they need all chasing that mega exit for it all to work out.
Add in that America is by far the best major market for generating investor return at the moment and a lot of it is that the American market embraces risk in a way that no others do.
There are VCs on this board. Would you want your founders to be sent to sell timeshares if their startups failed?