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One of the best life lessons is that labor is a market just like any other, and prices are set based on supply and demand. Whether a CEO creates more value than 100 engineers under him is neither here nor there.[1]

[1] Which is a fact that cuts both ways. It means that CEOs aren't "overpaid" just because they aren't more productive relative to their salary, but it also means that it's non-sensical to use income as a proxy for anything else as is often done.

Yes, exactly. That's why claiming the salary has anything to do with productivity is absurd. It's a combined measurement of how badly the company wants your skillset and how well you can negotiate.

Well, sometimes it's because your friends are on the board of directors, and they are doing you a favor (with someone else's money) in the hopes that you will return the favor to them when the time comes.

Or sometimes the CEO stacks the board with his buddies, so he almost certainly won't be fired and any votes on pay increases will sail through.

And don't forget including your culture's belief of how steep the power law curve of rewards is supposed to be.

The CEO-pay market isn't the same as a generic market though. The influence of the principal-agent problem is obvious, where 'management' is motivated to increase its own remuneration over time, and rarely drop it. (Yes, external directors are involved in remuneration but they're still not as motivated as the investors to keep costs in check.)

If only stock investors set the demand for management against the available supply and management was not involved (and at times, the price was allowed to drop significantly), it'd be more like a normal market.

http://en.wikipedia.org/wiki/Principal%E2%80%93agent_problem

One of the best life lessons is that labor is a market just like any other, and prices are set based on supply and demand.

Unfortunately, the labour market is a particularly illiquid and inefficient one, where things like actual value generated or risks taken tend to correlate poorly with compensation.

That is, prices in the labour market are set based on supply, demand, and huge distortions mostly caused by inability to judge value accurately and/or conflicts of interest.

CEOs of public companies are in the business of extracting wealth from that company. The ruling caste of equity lords all work towards this goal together by creating closed network systems of board members and executives; an executive Dave in Company A will get paid by board member Steve while Dave in turn sits on the board for Company B and assures payment for Steve who is an executive there. The selection process for an executive position is based on who is next in line in the network. I don't see any market forces at work here.

Considering the web of contacts and interrelationships between CEOs of companies and board members responsible for hiring and determining the pay of those CEOs, I highly, highly doubt that the market for CEO labor is anything approaching a free, efficient market that would arrive at an ideal price.

> I believe it too, that one person could be 100 times as productive as one other. But what the salaries are saying is that one CEO is more productive than all those 100 people below him put together.

We're not interested in the case where one person is 100x more productive than another because the second person is watching youtube. If the CEO is 100x more productive than the average person working for her, then she is, in fact, more productive than 100 of the people working under her put together. That's exactly what that statement means.

And, anyway, whether or not the CEO is 100x more productive, her output is worth 100x more. How do we know? Because that's what she's being paid.

Is she being paid for her contacts? It doesn't matter, so long as she's steering the company in the right direction. You're implying that "having contacts in the right places" is corruption, but it's not; knowing what to build and who to sell it to is a big part of running a company. CEO's don't spend their time conniving in smoke-filled rooms, they spend it trying to push their company forward.

Rich people don't get that way without providing something people want. Wal-Mart may or may not be lowering the quality of products nationwide, but what they're demonstrably doing is providing goods to people at great prices that let them generate a lot of profit. That's something people want, whether or not you agree with them. The RIAA, on the other hand, is a symptom of the power of the music industry - and the way the music industry got to have so much power, and so much money, is by providing music that people wanted to listen to enough that they paid for it.

> And, anyway, whether or not the CEO is 100x more productive, her output is worth 100x more. How do we know? Because that's what she's being paid.

He's only 100x more if you measure productivity entirely in money.

I'm not implying corruption, I'm saying it's separate from productivity.

Read what you quoted. Karazamov didn't say that the hypothetical CEO is 100x more productive, he said that he/she is worth 100x more.

"And, anyway, whether or not the CEO is 100x more productive, her output is worth 100x more. How do we know? Because that's what she's being paid."

Oh, the babe! Oh, the pure, innocent child!

When did HN turn into Reddit?

"Rich people don't get that way without providing something people want."

Well, to be precise, some ancestor of the rich person at one time provided something (some) people wanted. Not all rich people are "self made", even if you accept that silly phrase at face value.

For that matter, what about successful criminals? There have definitely been people who got rich through fraud, or extortion.

Alternative hypothesis: http://en.wikipedia.org/wiki/Tournament_theory

Do you have a definition of "more productive" that doesn't boil down to "gets paid more?"

I think the way to think about them is not so much as the CEOs actually producing anything, but being more of a productivity multiplier rather than adding to productivity linearly (an engineer). In this way, they can increase productivity by the equivalent of 100 engineers, without directly being as "productive" as 100 engineers.

> Rich people don't get that way without providing something people want.

Thanks for the laugh. So what did the six Walmart billionaire heirs provide?

Nothing, obviously, but most people who are rich in the U.S. did not inherit their wealth.

That may be true in the past, but according to study, who your parents are matters more in US than in most other developed countries.

http://en.wikipedia.org/wiki/Social_mobility

Factors that improve social mobility are not the same thing as inheriting an immense wealth. Bill Gates benefited tremendously from the good financial position of his parents, but his immense wealth came from his own work starting and building Microsoft.

They provided their parents with some happiness and peace of mind. Maybe.

>And, anyway, whether or not the CEO is 100x more productive, her output is worth 100x more. How do we know? Because that's what she's >being paid.

This may be true in the perfectly free market you encountered in your Microecon 101 textbook, but like the perfectly frictionless spheres from freshman physics, that is not an assumption that can be applied to the real world.

I don't even think CEOs are paid for their contacts. If you look at the number of CEOs who jump to unrelated industries, it's doubtful many of their contacts carry along. Also if contacts were so paramount, sales people would have an almost insuperable advantage - it is their job to fatten their rolodex everyday; whereas people from other departments can and often do become CEO.

I've been reading a lot of Thorstein Veblen lately, who is very thought provoking; and I think what he would say (not that I completely agree, but it's an interesting viewpoint) is that CEOs are paid to be the right social class. The board of directors prefer to rub shoulders with someone they can easily relate to; a person who, say, plays a decent game of golf and can casually discuss the market for mansions as well as the features of the latest model Porsche. (Let's be serious, all else being equal we all prefer interacting with someone who shares our interests.) So they are willing to sacrifice 0.1% of the company's bottom line in return for smoother interaction with the person who will, in effect, be their main point of contact. People who already earn a lot of money (and would, of course, not switch for a decreased salary) thus have a big advantage when interviewing for the chief position. In fact, if nobody in the company is already living a sufficiently wealthy lifestyle, this model would suggest it's more likely for an outsider to be brought in (upon, say, acquisition).

On the other hand, look at the history of Apple. It had multiple CEOs, and was nearly bankrupt until Jobs took it over, and built it into the biggest company (by market cap) in the world.

This was clearly due to Jobs' decisions, which were enormously productive in that they produced hundreds of billions of dollars worth of wealth.

Indeed, a company of talented people working on the wrong things is worthless. So too is a company of talented people working on the right things but in ways that undermine their chances of success. CEOs (sometimes) have the power to make decisions that determine whether the company they lead is able to be successful.

A CEO isn't a CEO if he doesn't have the decision making authority. CEOs get paid well because their decisions make or break the company.

It is clear? It is a compelling story, but people also see dozens of compelling stories out of sports every year where it is much more obvious that a lot of the variation is chance.

This is not to say Jobs was a bad CEO or it was pure luck, but to say Apple's turn around was mostly due to Jobs' decision making seems not that clear to me.

Steve Jobs was an outlier. It's not useful to use him as an example if you are talking about CEOs in a general sense.

Some CEOs might be worth x100 the average salary. A small few are exceptional, many are middle of the road, and some probably drag the company backwards (e.g. Ballmer at Microsoft).

But Steve Jobs' salary was $1, the lowest at Apple.

This is far from the full picture. He got a generous stock options deal and a corporate jet.

He absolutely deserved those for his achievements, but the $1 salary was a brilliant piece of "optics" that would fit nicely into headlines. According to the link below, this was equivalent to almost $40m per year in benefits.

Of course, no one remembers the mouthy paragraph above, and the "$1 salary" thing get remembered.

http://www.quora.com/Steve-Jobs-2011-biography/Was-Steve-Job...

A bad CEO can do a huge amount of harm to a company, even if it has excellent workers. So perhaps the value of a CEO is more in that they put the right people in the right positions and don't hold them back.

So in a sense to get a measure of the "value" of a good CEO you would need to not measure them against a bad CEO but perhaps against a company without a CEO at all where smart people self-organise.

The range of potential CEO productivity effect is much greater than that of most employees and I suspect is a multiplier effect on the whole company rather than a simple addition. The worst case is a negative effect on a scale that bankrupts the company. On the positive side if a great CEO gets 1% more productivity out of their staff than a good one that difference in a company employing thousands is worth paying upto 1% of the total salary budget for a great rather than good CEO (if that is what they cost in the market and you can identify them).

There are big issues about how you identify great CEO's but there are real reasons to pay massively for the best.

The other factor is that people (CEO's, traders, salesmen) who can directly point to profit/income that they are responsible for can more easily show their value and in many cases claim a portion of that rather than a wage based on more normal market competition.

You aren't paid according to your productivity. I don't know who came up with that idea.

You're paid according to how difficult you are to replace.

> Everyone, just admit that the CEO's are paid for having contacts in the right places.

I haven't been able to fully shake the idea that our modern notions of wealth, money and currency are built on a type of social proof pyramid. But I can't quite articulate why. What do you think?

This sounds like an interesting viewpoint. Could you elaborate on the properties of this pyramid?

For example, I want to connote that acqui-hires rather than buying traditional economic value, symbolize an acquisition and alignment of social proof.

>Wal-Marts lowering the quality of products nationwide and RIAA lowering the quality of free speech nationwide.

I am at a loss to understand how you can equate a company that is successful by helping poor families lower their cost of living with an industry group that uses the power of government to stifle competition and maintain an artificial, obsolete business model.

Nor do I buy 54, the idea that rich people create more wealth for society from by-products, like Henry Ford gifting us with the automobile. I don't think it's correlated.

Why not?

As I wrote, I think rich people are a form of concentration of power, and this could be used to create factories that make products that increase our standard of living or it could also easily be used to, e.g., lobby congress to create stricter laws to fund for-profit prisons. So the Henry Ford types can happen, but it's not guaranteed that they will IMO.

EDIT: To be clear; I mean "fund for-profit prisons with prisoners."

The question was, "Why do you believe a society can prosper without allowing people to become rich?"

I didn't claim that, so that's an irrelevant question. I claimed that prosperity is not a foregone conclusion after having rich people. That is trivially provable by observing certain countries.

Nor do I buy 54, the idea that rich people create more wealth for society from by-products, like Henry Ford gifting us with the automobile. I don't think it's correlated.

You said, "Wealth for society isn't correlated with rich people." If that were true, then it should be possible to have a wealthy country without letting people become rich. It's not.

Maybe we're talking past each other. You're saying you don't like powerful rich people. I'm saying you have to let people become rich, or your country will be poor. Maybe the countries you're thinking of have rich people, but don't let people become rich except through inheritance. That would result in a poor country.

(Incidentally, PG's essay explores that point, too, which is why it's a bad idea to tear apart his essays into a gigantic numbered list.)

I didn't say I don't like rich people. You are being intellectually dishonest now.

Strawmen must die!

The interesting question is whether there is a correlation between _how_ rich you can get in a country, compared to it's GDP / PPP.

I don't think you'll find a simple correlation if you compare those. Excluding countries that are rich in natural resources, there are some countries with very high GDP/PPP that have a comparatively high income equality / low CEO pay (Sweden / Denmark).

If that were true, then it should be possible to have a wealthy country without letting people become rich. It's not.

Yeah, 'cause every beggar or migrant worker (that make up most of the population) in the petro-sheikhdoms, is secretly a millionaire.