The growing size of firms may help to explain rising inequality
economist.com
economist.com
Say you are a service company.
You have 20 employees, and one manager. The manager makes twice as much as the employees, because customarily managers make more than their subordinates.
In a small business, the manager is the owner, and his salary is twice as much as the average worker.
Now say you are a bigger business, and you have multiple outlets in the region. Your regional manager manages 20 outlet managers, the 20 managers each manage 20 employees. Your regional manager makes twice as much as the outlet managers because managers make more than their subordinates.
Now say you are a national business, and you have 20 regions each with 20 outlets per region. Your national manager manages 20 regional managers. Your national manager gets paid twice as much as the regional managers.
And say you're an international business, and you have a presence in 20 countries each with multiple regions with multiple outlets. You manage all of the national managers, and so you get paid twice as much as them.
The small business has a situation where the business owner makes twice as much as the employees.
The international business has a situation where the top of the management chain makes 32 times as much as the employees.
That's using a really simplified model, but the larger the business, the more layers of management will likely exist, and we have a system where management expects to get proportionally more money than those they manage. That's discounting any human or sociological factors that might contribute.
I think the biggest change that could correct this issue would be to do away with the idea that your boss makes more money that you is just a given.
If the less preferred CEO candidate is marginally less efficient in maximising profit it costs the firm $XX million. A botched acquisition costs $XX-XXX million. Misguided strategic changes could cost $Xbillion over the next few years and be irreversible. If the markets disapprove of the less-preferred CEO candidate their appointment might even wipe $XX million off the share price overnight, before they've even had a chance to act.
How much the lower echelons of staff able only to affect the performance of their own department earn doesn't even enter the calculus, except perhaps to note that the new CEO can certainly justify $X million more if he's really good about identifying which areas those staff need to be cut.
This is simply not true. Executive skill is very highly overrated. There is no "magic" these overpaid executives have that uniquely enables them to run large companies. This received wisdom probably comes from the efficient-market hypothesis, in the sense that if executives are paid so highly it must be that there skills are amazing and valuable. This need not be true. It may very well be due to a mix of cronyism, posturing, and self-promotion.
Let's end this nonsense of executives being the crème de la crème of intellectual superiority.
Other than that there aren't any specific job requirements, you could be the CEO of a company like General Motors and not know a lot about cars because you've got plenty of people around you.
People who have only logical/analytical skills usually fail because they're blind to the emotional realities of the people they deal with. They may be able to make great decisions - when all of the trade-offs are carefully spelled out for them. But when you're CEO, the vast majority of important information is unstated, in how people feel about a course of action, and developing those social skills is necessary for quickly taking the emotional temperature of a room and understanding what people really desire, how much they desire it, and what you can do to make them happy.
Conversely, people with only social skills get paralyzed by decision-making when thousands of people are involved. They want to make the people closest to them happy, which means pissing off a lot of people who aren't complaining now but soon will be. That's the "difference between the corner store owner and Walmart CEO" that the article is talking about.
The best executives I've seen manage to combine deep emotional intelligence with deep intellectual intelligence. They can both quickly understand how everyone is going to feel about a decision (including, particularly, how the people who are going to be hurt by it will feel), and then select a course of action that minimizes the hurt and maximizes the benefit, understanding all the time that some people (often, many people) will be pissed off at them.
I find engineering types are especially prone to underestimating the difficulty of other jobs, and we have very little context to evaluate executives who have very little overlap with engineering.
This is the general case. Wish more people thought humbly about other positions besides theirs.
To some degree I agree with you.
Some of the most profitable companies I've worked for have very shrewd CEO's. I worked at a bike shop when I was still in college (Eriks Bike Shop). The guy started his business when he was 14. When I worked there, he still only had around 10 stores. One of the smartest things he did was get real estate in smaller areas, off the beaten path and grow his customer base. Once he had a big chunk of the market, he'd close those stores and open a bigger shop right off the highway, near the old store. He also had a very close knit group of people at the top. As far as a I know, it's still just him, the VP of sales, the head IT guy and one other guy. Less than 6 guys effectively now run 22 shops in two states and do multi-millions in sales every year. Erik never went to college, and started this right out of high school. A good example of someone without the groomed skills you're talking about.
The other places I've worked, like most of the bigger fortune 500 companies, they usually had Ivy Leaguers who either had PhD's in either business or economics or both. To me, these skills aren't overrated. If you've gone to Yale for 8-10 years and have a PhD in Business Management, then yeah, you have skills which most people will never have. As such, they have certain abilities and insight most other people don't. To me this makes them uniquely qualified to run large businesses. Not just their degree, but also the market and business insight expertise is crucial. Sometimes I don't think you just get that from working in a certain industry for a certain period of time.
It's like the pyramid schemers (I mean network marketers) who make claims about how you too can have all that sweet passive income. No, the structure only allows for a small percentage of the overall population to sit at the top, no matter how 'lucky' or 'skilled' an individual is.
Yes, there is only so much room in these kind of schemes at the top.
However, I don't buy this statement that "skill" is not involved as I have seen certain people simply rebuild these kinds of networks over and over.
There is a real skill in being able to work a weak, but large social network.
If you've gone to Yale for 8-10 years and have a PhD in Business Management, then yeah, you have skills which most people will never have. As such, they have certain abilities and insight most other people don't.
I don't think that this is relevant to their ability as an executive. In the same way, I generally don't see PhDs being good developers or engineers. In some cases it denotes passion, but more and more these advanced degrees seem to only signal a desperation to get a piece of paper and an inability to escape from a fairly exploitative and abusive system.
A good executive turns people into tools. You offload your problems into the minds of others and then efficiently recoup the outputs. This is far more difficult to do well than one might think. The sheer volume of things that need to be orchestrated and then mentally cataloged when you operate at that level is overwhelming for most people.
I recognize this is all anecdotal but the outpouring of anecdotal executive-sympathy in this comment thread is mind-boggling; a little push back in the other direction seems not out of line.
Jobs' annual salary was $1 from 1997 until his death.
Just saying ...
The problem is that very few of the people who have those jobs can do them well. Most executives fall quite short in most of the necessary areas. But they manage to skate by anyway.
90% of being a leader isn't necessarily having a specific skill or specific domain knowledge, it's about having the courage to make unpopular decisions, dealing with the fallout alone, and leading by example when the going gets tough.
So you're saying there's a broad class of people who can do the job well rather than a tiny clique?
Most executives do none of these things.
Right, but let's not pretend that executives are just you're "everyday folk". It still takes a specific set of skills, excellent interpersonal ability, leadership, drive, and a few others. It isn't a walk in the park, show up 9-5, and earn a nice paycheck.
So don't be so quick to just "write executives off". Odds are they have a lot more going on than one may think.
Basically, executives aren't getting better. The tools that the employees that work for those executives are, so much so that the employees no longer need to go through the command and control hierarchy to get things done across business units.
See:
Steve Yegge's Amazon Platform Rant: https://plus.google.com/+RipRowan/posts/eVeouesvaVX
Google Protobufs https://code.google.com/p/protobuf/
Facebook's Thrift https://thrift.apache.org/
... and all the other SOA enabling technologies the reduce transaction costs* stemming from coordination.
In general, markets with low concentration are defined by competition while markets with high concentration are defined by power. For measures of concentration see the HHI or the concentration ratios.
[0] - http://en.wikipedia.org/wiki/Herfindahl_index [1] - http://en.wikipedia.org/wiki/Concentration_ratio
(They've displaced things like pension programs, but those are even less flexible)
It also diverts money away from more conservative long term investments in tangible wealth like real estate and into the stock market, so people are less diversified and lose out when the markets go down. 401k's really only let you take long positions, while financial firms can take either side of the trade... you can reason out who the winner will be in that situation.
I have an IRA through my employer (which happens to be my own company, but that's irrelevant). I can bet against the market via ETFs if I want in my IRA. Your employer just chooses a plan for you with crap flexibility.
I think the biggest change has really been the social acceptance of massive consumer debt. I cringe so hard every time I hear someone say something like, "I paid down my credit card a bit so I could buy that new XBox." People didn't used to live that way and the removal of pensions had nothing to do with that. I would still put a lot of blame on Wall Street there, but not because of fees on retirement plans.
I also agree about the social acceptance of consumer debt. They say you learn from your mistakes, and boy have I done a lot of learning. Resolving to get and stay out of debt is a life changing decision for sure.
And, even if retirement accounts do impinge a bit on things like small businesses, do remember that stable retirement prospects are a social good.
Also, I wonder if 401ks and IRAs have that much weight in the grander view of "invested" money saved away, considering their tax-deductability, and thus appeal as a savings plan, is limited and constrained (this year: $18k for a 401k, $5.5K ($6.5K if you're over 50) for IRAs).
In this sense inequality is unavoidable fact of life. Much the same as some people are gifted with genes making them more likely winners in a long distance running contest. Unequal but hardly unfair as long as a fulfilling life is possible regardless of such deficiencies. The problem should be phrased in terms of opportunities and social mobility, instead of inequality.
It is ironic that a publication owned by the Rothschild family is espousing these views.