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Comment by bedhead | Hacker News Reader

It's really sad how wildly distorted executive compensation has gotten. The best phrase I heard was "entrepreneurial reward for managerial duty", and I fear it's become all-too-common. My eyes popped out of my head recently when I saw that Coca-Cola (yes, that same drink company that's done just fine for over a hundred years and whose organic growth rate might be 1% if they're lucky) was trying to give management $13 BILLION over the next four years. It's insanity. And when it's not simple pay, it's severance packages that give Fuck-You money to people whose performance provably dreadful. Leo Apotheker made $25 million on his way out the door from HP, after vaporizing over $6 billion in buying a fraudulent company and doing virtually no due diligence. It's madness, pure madness. Executive comp is a bubble, these people aren't worth anything near this much, but I have no idea when it will pop.

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Let me play devil's advocate for a minute.

The guy's cash compensation, $500k. That is a about 2x what Google pays their top engineers (about $250k) The rest of his package was stock. [1]

The compensation theory goes that if you do well the stock will do well, if you do poorly the stock will do poorly. So most of your compensation is a chunk of stock, in this case about 2.5M shares as "RSUs" (a restricted stock grant with performance tuners tweaked to company performance)

de Castro's stock did well because of the Alibaba thing not because of what he did. So that left him with a chunk of stock. Had the company done poorly that would have been worthless. It could still become worthless. The filing indicates he got 1.5M shares in restricted stock, he no doubt will have to sell a chunk of that to pay the taxes on those shares (it will be treated as ordinary income by the IRS) and California.

When these stories are reported they pick the biggest cash number they can, but the actual value may be significantly less. Large stock grants are a tool to keep executives interests aligned with the company interests, they are given a lot of stock and huge restrictions are placed on their ability to sell that stock.

Had he stayed at the company, the restrictions on selling would have prevented him from realizing that stock value immediately.

[1] http://www.sec.gov/Archives/edgar/data/1011006/0001193125141...

It's possible he filed an 83b election and paid taxes at the value of the stock when he received it (even though it hadn't fully vested). If so, his tax liability would be significantly less.

In this case that is impossible. If you pick through Yahoo's filing you will see that what he was granted were "RSU"s not actual stock. This is something that Google uses too. Basically the value of an RSU is nominally one share, except that it is moderated by a performance evaluation. So if your moderator is 0 then your RSUs are 0 * n or 0 shares, if your moderator is 1.0 your RSUs are worth an equivalent number of shares, and if your moderator is higher than 1.0 your RSUs become a larger number of shares. The transform happens at the actual vest time. And fortunately there is a loop hole in the stock sales of insiders that allows for them to sell as many shares as they need to for tax liability purposes.

The reason the 83b is impossible then is that he doesn't know how many actual shares this will be. But that is ok since the company sells some of the granted shares to withhold for taxes.

This scheme of 'introducing a moderator variable' gives the company exceptional leverage over the employee as they can 'take back' all of their stock grant by setting the moderator to zero.

I don't know what his contract looked like but I'm guessing it has a minimum value exit (that was used to get him to change jobs) so it would have been hard for them to not pay him any of the equity.

I have no problem with stock compensation, but why so much equity compensation? 1.5M shares in restricted stock is mind-bogglingly unnecessary.

And even if you factor in taxes, he got a heck of a payday.

Under normal situations (he's employed) the stock is largely useless. There is a bunch of paperwork to fill out if you want to sell any of it, you have to pre-set the sale date and follow through almost regardless of what is happening, so its "compensation" but it isn't "cash in your pocket you can spend."

But what it does do, is give the holder the sense of wealth which is directly tied to the value of the stock. Make the stock go up and you certainly "feel" a lot wealthier even if you can't actually take action based on that feeling[1]. But you're very motivated to get that feeling and make the stock worth more. (at least that is the theory).

At the C level and even at the EVP level, you're asked to make some pretty big decisions, decisions that could turn out to make you unemployable if they look really stupid in hindsight. Sometimes the only way to get someone to take that job is to give them some assurances that even if they become unemployable they won't become homeless. (Yes, your argument is still valid, 250K shares would probably do that _at the current valuation_, the question then is risk mitigation)

I'm not saying that I agree with the decision but I am familiar with some of the reasoning that the executive compensation committee goes through when coming up with these numbers. [1] One huge loophole used to be (and may still exist) is that you can sell stock to pay off a mortgage.

Here is Marc Andreeseen's interesting take on why exec compensation maybe high:

Conventional theories of exec compensation being so high either (1) what market can bear or (2) board/mgmt agency problem out of control. Alternate theory is exec comp so high as insurance policy against catastrophic visible public failure; exec firings can be career ending. From this standpoint, top exec especially at highly visible and controversial public co should demand a lot due to career risk of failure. Particularly since exec blowups at this level not always based on performance; can be lots of political juju, need for fall guy, etc. Fourth theory, however, my personal favorite—exec comp so high as motivation/prize for best lower-level people to stay at big company. Versus leaving to go to increasingly attractive (1) venture-backed startups or (2) private-equity-backed buyouts. I.e. paying a few people at the top a huge amount of money keeps lots of lower level people on the hook due to enticing future payoff. My guess: exec comp levels go up from here, as end markets get larger, tech & market change happens faster, and jobs get more dangerous. http://pmarcatweetsasblogposts.tumblr.com/post/73998948125/w...

I was just reading "Predictably Irrational" where he speculates that it's because in the early 90's, public companies were forced to make executive compensation public, so executives suddenly knew what others were making and that gave them a huge lever in negotiations. He draws a correlation between the creation of the rule and the sudden rise in executive compensation in the early 90's.

Is correlation causation in this case? Seems like it's worth exploring. I don't know how boards get away with the gigantic exit packages though, except that it's probably because all these C-level execs sit on each others' boards.

As for career-ending, how does this explain things like Robert Nardelli? Personally, the only thing I see ending an exec's career is prison.

Or there is the simpler explanation that executive compensation is high because there's nothing to stop executives from looting their companies anymore. The traditional forces that would have restrained them (public shame, strong boards, shareholder conservatism, labor unions, tax consequences, etc.) are all at historically weak levels today, so there's nothing stopping executives from raiding the cookie jar. And each time one of them does, he pushes the compensation level all the other ones feel they have to reach to be "in the game" higher, creating a vicious circle.

Like most things in life, executive compensation is about power. And when one side has all the power, it's not surprising to see them use it to enrich themselves.

That would be 1 above, i.e. what the market can bear.

Wrong. Board of directors, who are elected by company shareholders, can limit executive pay. They do this constantly. I'm assuming you're very new to this.

Just because they can doesn't mean that they do. Or that they are as effective at limiting pay as they were in the past.

Yes they can.

However it is far more profitable to increase the executive's pay so that it dwarfs their own obscene compensation. That is extremely common in public companies.

> Alternate theory is exec comp so high as insurance policy against catastrophic visible public failure; exec firings can be career ending.

Sweet. Now show me where is the insurance against career-ending events (as in: being fired and not being able to find equivalent work again) for rank-and-file engineers.

What do you say? "No such thing?" Yeah, that's my point, precisely.

Wouldn't the fourth theory only make sense if companies routinely hired executives internally? In the old model of "assembly-line worker eventually works his way up to Ford CEO" I could see high compensation at the top being used as a kind of carrot to keep people motivated about climbing the internal career ladder, instead of jumping elsewhere. But afaict most companies nowadays don't hire execs from internal candidates. The COO in question here, for example, was not a Yahoo employee prior to being brought in as COO (he was hired away from Google, not promoted from within Yahoo).

Here's my theory on it. The main problem is that companies only use one method for determining pay: comps. That's it. They just look around at peer companies and pick a number that's average or higher. It's a perpetual arms race with things only moving in one direction. One guy gets a raise? Effectively everyone does, too, because the median/mean just went up. After 30 years, the compounding effect of this becomes unimaginable.

But that's only half the problem, the other half is that using comps with respect the executive pay is boundless in practice. Think of it compared to housing prices. Home prices rely heavily on comps to help determine the market, but real prices can only go so high because there's only so much debt burden buyers can accept. Prices are effectively capped (in the short-run) by income. This is not the case with companies, particularly bigger, stable companies that are more-or-less on autopilot. Technically, the "market can bear" paying the management billions since these companies are large and profitable. It's just a skimming operation.

What we have now is people, oftentimes interchangeable and generic people (and sometimes even downright morons) making unspendable fortunes for simply showing up to work. Someone else built this thing. Other investors provided the capital. And somehow, you get Fuck-You money. There's no incentive alignment anymore.

God that is the truth. And the push for stock buybacks just continues to gloss over the issue. Stock outstanding continues to decline, but the amount of money spent on buybacks should be pushing shares out down twice as fast. Instead ridiculous stock options (executives need to be invested in the Company!) continue to dilute the impact of buybacks.

Side note: asset bubbles pop. Executive pay is not an asset.

I don't know where you work or what you do for a living, but I've heard a similar rant about executive pay from hundreds of people, whereas I've only ever seen a handfull of people trying to do something about it.

So, I propose to you, if this hurts your sensibilities so much, what are you doing about it? Are you continuing to feed the machine by working as one of their employees? Are you participating by trying to create an aqui-hirable startup? Or are you pushing to enact change?

There is nothing we can do, really. Money is very close to power, and obviously the relatively poor (those who rely on a salary) have far less say and control than the extravagantly paid (those who do not require a salary). It is a fundamental trait of our free and capitalist society. We're merely mourning obvious inefficiencies, "bugs" in the convoluted system of laws and philosophies and culture that govern our society.

This is a suboptimum outcome, in our opinion. Watching inequality rise dramatically over a few short decades only bolsters the belief that these are suboptimal outcomes.

And watching these unmeritorious fools perform poorly while being paid thousands of times the average pay of their own staff is disheartening. It's obviously not a meritocracy. It's obvious that the extravagant, suboptimal pay scheme isn't buying quality leadership, nor is it rewarding any kind of out-sized risk on the part of management. Tiny risk compared to venture or entrepreneur, small or negative benefit, massive reward.

Sure, we can do something. It's called popular political action.

Also, we can encourage one another to shift our consumption habits-

If Coke is earning so much money and misbehaving, let's patronize other soda companies!

If Yahoo is doing the same, let's spread out to other mail and search providers!

I would point out the recent fun little study showing that the class we are (those who work for a salary) have less say in policy outcomes than the rich (those who do not require a salary).

They bill it as "The US is more of an oligarchy than democracy" because those very few >0.1% of Americans have a greater political say than the rest of us.

I don't think engineers earning six figures are relatively poor. You should learn what poor is before you say something like that. They are solidly middle class in one of the most prosperous times to be middle class. And the middle class is designed to sit between the upper (capital owners) and the lower. You're paid to augment their capital. So if they get filthy rich off of your work, despite their bad decisions, it shouldn't matter to you. You're every bit a part of the problem, and you choose to be a part of it. You don't need to live in the Bay Area. You don't need the best schools. You don't need fancy new tech toys. You don't even need US. You choose to be a part of the middle class in order to receive those luxuries.

>>You don't need to live in the Bay Area. You don't need the best schools. You don't need fancy new tech toys. You don't even need US. You choose to be a part of the middle class in order to receive those luxuries.

I was with you until this part. You can't just tell people they don't need their current resident city or country or what schools they(or their children) need.

Running away from a problem is almost never the right solution.

I think the point he or she was trying to make is that you control your own happiness and shouldn't make that depend on things that are outside of your control.

I agree with that sentiment, it's the advice I generally give people who are in a bad situation. But if you look at it from the country's perspective it feels like avoiding the problem, and isn't a solution.

I'm pointing out that they're choices, not needs. They are things you can live without, and if you see a problem, and you feel strongly about changing the world, then you can sacrifice these luxuries.

And it is absurd to claim that I am advocating running away from a problem. I absolutely want you to tackle the problem head-on. But by voluntarily enriching the aristocracy, you are part of the problem. So I find it painfully hypocritical to complain about your bosses earning too much, while at the same time choosing to be their employee.

> They are solidly middle class

Not really. If you earn $120k a year (just over 6 figures) you're in the top 10% of income earners in the US. The fact that you think they're 'middle class' (and relatively speaking, I don't think you're wrong) is indicative of how bad the wealth gap has gotten.

Dollar figures are useless for this; got to factor in cost of living too.

Sure, I'm not discounting that. I live in NYC, and the cost of living is certainly an adjustment to your wealth. That said, I think it would still be disingenuous to consider anyone making $120K a year middle class.

The bottom 50-90% of the top 10% of earners is very much part of what is traditionally called "middle class". People in high-paying professional occupations such as doctors, lawyers and engineers have always been considered part of the middle class. The upper class is made up of capitalists and high-level executives, not people who work for a living.

Source: http://en.wikipedia.org/wiki/American_middle_class#Academic_...

Interesting! I didn't know there were different distinctions.

Still, I think your source really just proves my point: by no means is anyone earning 120K a year "solidly middle class". By pretty much all of the definitions you listed, 120K a year would either be "upper middle class", or "the rich" (e.g. find me a homeowner in SF who doesn't have >1 million in home equity).

I think the underlying problem here is managerialism [1], which is mainly a cultural problem [2].

The way that one solves cultural problems is mainly by talking about them. If enough people are saying, "Hey, this prohibition thing doesn't work," and do it for long enough, then eventually the unquestioned cultural assumptions dissolve.

So my question for you is: why are you standing in the way of people doing something about it by being a jerk?

[1] http://en.wikipedia.org/wiki/Managerialism

[2] http://www.amazon.com/Confronting-Managerialism-Business-Eco...

Culture? Surely the legal framework and tax environment of corporations could be adjusted to fix at least part of that problem.

As with alcohol prohibition and, later, drug prohibition, I think the legal environment flows from the cultural notions.

Managerial pay has gone up not because executives are hundreds of times smarter or more competent than a couple generations back. It's because the cultural notion of executives as a higher corporate caste has become much stronger.

In other words, it's not that we rationally measured the value of CEOs and paid them accordingly. It's that we stopped really thinking about it. In, more ore less, the same way that people stopped thinking rationally about drugs for some decades. The change in marijuana laws in the US is now happening not because of new facts, but because of new attitudes.

A shift away from managerialist thinking might similarly trigger new laws. But I doubt it will work the other way around. Especially given the new research showing that laws basically respond only to the interest of rich people and businesses: http://www.princeton.edu/~mgilens/Gilens%20homepage%20materi...

Let me know how that works. The have-nots complaining about the haves being unworthy is probably the most discussed topic in the history of humanity.

It worked pretty well for alcohol prohibition, and appears to be working for drug prohibition.

I think it has a reasonable chance of working for managerialism over the next couple of decades for a few reasons.

One is the giant spike in inequality. The elite are capturing more and more of the money, causing more and more resentment.

Another is the shift in public communication. For a while, most of the information people received was filtered through mass media. The internet has made it much harder for moneyed interests to dominate what people see. HN is a great example; I'll probably read 5x the words from commenters versus the original article, and much of it is contrary or probing. And a lot of what is linked here is not commercial media; it's individuals publishing directly.

A third is a shift in communication costs. Large companies had a major advantage when communication was hard and expensive. But now that it's free and easy, people have less need to work in highly controlled corporate structures. Thus the rise in freelancing and entrepreneurship. It also makes it much easier for people to switch jobs, reducing the effective power of a managerial elite.

I think those together are having interesting effects. It's my hope that we'll shift back toward seeing executives as stewards of valuable organizations of people, and less treating them as magic sources of all value.

Regarding the first bit, bubbles: executive pay isn't an asset. Executives are the asset. And given the enormous historical run-up in executive pay, it's not unreasonable to ask whether it will return to its earlier baseline.

It's different than the typical asset bubble in that most of the people setting executive pay are also executives. But it could still just as well be a bubble.

> executive pay isn't an asset. Executives are the asset.

If so, it's a special kind of asset, that can dictate the conditions of its own "usage".

You say Executive pay is not an asset. So if an executive owns the deed to a house, you'd agree that's an asset, but if the executive maintains a skill to be hired for 200k/day, that this is not an asset?

Doesn't an executive's ability to convince a company to pay 200k/day fluctuate based on market forces just like how people price homes or tulip bulbs?

Absolutely. They cost so much more than they did before precisely because of market forces.

Good luck convincing all of the underpaid $120k/yr salaried engineers, though. 95% of the world would kill to live in the cozy little bubble of tech, but that doesn't matter because those other guys over there are getting even more.

No matter how much you have, you always want more.

Historically, when too much power migrates towards the top, the only way to restore balance is via some sort of violent commotion. But perhaps things have changed now - at least I hope so.

> what are you doing about it? Are you continuing to feed the machine by working as one of their employees? Are you participating by trying to create an aqui-hirable startup? Or are you pushing to enact change?

The nature of this imbalance is a positive (self-reinforcing) feedback loop. Power begets power (and lack of it begets a deeper deficit). Again, we're back to square 1 - explosive social upheaval.

Human nature sucks.

I manage a hedge fund, so I'm close to the issue. I have read more proxies than I care to think about, it's always the first thing I read when looking at a company.

Your question about what I'm doing about it is fair, so here goes another rant. As a manager, my feet are held to the fire every day, and my compensation is 100% formulaic. If I don't perform well, I don't get paid well, PERIOD. My pay isn't subjective, or based on what Ken Griffin earned. I have put in measures that ensure I cannot get rich for simply "showing up". Do you know what else I did? I did something that almost no other hedge fund manager in the country does, which was put in a clawback. (My auditor, who did about 2,000 hedge fund audits last year, told me exact two other fund have this) If I make money in year 1 and lose money in year 2, I will end up giving back possibly a significant portion of my year 1 fees to my investors. Why should I get to get rich from one great year, then suck afterwards with no consequences? In my industry at least, I'm doing more than 99.9% of people to fix the problems.

I WANT my incentives to be aligned. I WANT to make a lot of money, but I refuse to do it without merit or in a way that I can't feel good about explaining it to my kids. So I guess that's why I'm so maddened by the executive comp bubble, because I am trying to do something about it.

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