Lowering CEO to average employee ratio

[LC]

The MSFT CEO was 100% responsible for making the decision to buy Nokia which turned out to be a $10B writeoff.

 

Here the CEO's decision cost the company $10B

 

 

Warren Buffett is 100% responsible for the decision to buy companies.

 

Is the future success (or failure) of those companies 100% attributable to Warren Buffett?

[wachtwoord]

Longer term if automation goes ballistic, society may have to figure out how to compensate people who don't work.

 

Short/medium term unless trends outlined by vox change, the situation likely will continue. Things might change if/when labor force decreases because of low population growth. Things may change if/when global income rises to developed country levels - but this is slow and doubtful.

 

Personally, I want to live in society that doesn't have huge social inequality, since IMO this raises crime rate and risk of social disturbances. I doubt that I can influence the situation much though.

 

Large social inequality is the natural state for a human society as the discrepancy between the skill level of people is also rather large. The vast majority of the population is mostly useless. If anything, with automation, that discrepancy will only increase further.

[randomep]

The MSFT CEO was 100% responsible for making the decision to buy Nokia which turned out to be a $10B writeoff.

 

Here the CEO's decision cost the company $10B

 

 

Warren Buffett is 100% responsible for the decision to buy companies.

 

Is the future success (or failure) of those companies 100% attributable to Warren Buffett?

 

Warren Buffett buys no brainer companies. What is the probability that Warren Buffett's  $30B investment in BNSF will go to 0?  If something bad happens to rail he'll get a ton of dividends and then probably sell it such that he can break even with dividends. Downside and upside are limited. Anyone can see that at the time of acquisition. What is the probably the Nokia will go to 0 at time of acquisition? I'd say honestly at the time 25%? Someone has tons of cold hard cash and decides to plow it into something like Nokia better know what the hell he is doing.  And Ballmer I can argue in hindsight did not.  I can argue only a few living gods among us do.

 

 

[Guest]

I'm of the opinion (perhaps I'm wrong) but it seems a little outlandish that a CEO can take risk and fail (Mayer, for instance) and still get a huge payout. The average employee fails and is fired. I think a big real (and I think Buffett talks about this) is that CEO compensation really started to get out of wack when company's were forced to disclose compensation. Personally, the gap wouldn't bother me much if they were taxed more. As technology takes over more and more jobs, executives (or others that were hard working/lucky) will keep getting a bigger and bigger piece of the pie. Eventually, I don't think that will end well.

[LC]

The MSFT CEO was 100% responsible for making the decision to buy Nokia which turned out to be a $10B writeoff.

 

Here the CEO's decision cost the company $10B

 

 

Warren Buffett is 100% responsible for the decision to buy companies.

 

Is the future success (or failure) of those companies 100% attributable to Warren Buffett?

 

Warren Buffett buys no brainer companies. What is the probability that Warren Buffett's  $30B investment in BNSF will go to 0?  If something bad happens to rail he'll get a ton of dividends and then probably sell it such that he can break even with dividends. Downside and upside are limited. Anyone can see that at the time of acquisition. What is the probably the Nokia will go to 0 at time of acquisition? I'd say honestly at the time 25%? Someone has tons of cold hard cash and decides to plow it into something like Nokia better know what the hell he is doing.  And Ballmer I can argue in hindsight did not.  I can argue only a few living gods among us do.

 

Buffett is just one example that the person making a decision is not necessarily responsible for the successful/unsuccessful outcome from that decision.

 

If the gov't decided to nationalize the rail system and break up the oligopoly, is Buffett responsible the same way Ballmer was "responsible"?

[TwoCitiesCapital]

The real problem with CEO wages, as with most, is that the benefit is concentrated and the cost diffuse. The average shareholder may contribute $0.50 of their share in profits/revenue/etc. to a CEO in any given year. How many of you are willing to go through the effort to fight a proxy battle limiting CEO wages for that $0.50 gain a year? How many of you believe a CEO is going to fight for his $10,000,000/year?

 

This is no different than poor gov't policies that favor a handful of people at the cost to the population. Things like subsidies for farmers - the average person doesn't care that $0.10 of their taxes go to farmer subsidies, but the farmers care quite a bit. If you try to cut that fat from the budget, farmers cry foul and the normal people don't speak up so it stays. It's not a real problem until people realize this is how it works and then you literally get thousands of $0.10 charges that you can't get rid of.

 

The best policy is to prevent stuff like this happening in the first place, but that rarely happens because there is no accountability along the way given the diffuse cost is so small. The next best policy is to make sure it benefits you instead of others.

 

 

[LongHaul]

I often find that European CEO's are paid substantially less than US CEO's for comparable companies in size. Why is that?  I am not fully sure. Some observations and who is really at fault in the US from my experience fighting some of this stuff.

 

Institutional shareholders are:

 

1.  Lazy.

2.  Corrupt.  (conflict with managing pension funds, etc)

3.  Lack Courage.

 

Retail investors are similarly lazy.

 

Jurgis is right - vote against the most extreme comp plans and vote against the board.

Have some courage in your life.

 

I have seen blatant legal theft by mgmt and the institutional shareholders just vote to approve the comp scheme, options and board members.  I tried to convince them otherwise but they were just wusses.

 

The end cause is pathetic shareholders.  If mgmt stinks and the board doesn't respond there should

be a less than 25% vote for these board members.  But it rarely happens.

 

Ben Graham found something similar around 75 years ago.

 

Articles on US vs other countries ratios of CEO pay to average worker.

http://work.chron.com/ceo-compensation-vs-world-15509.

http://www.theglobalist.com/just-facts-ceos-rest-us/html

[DonFanucci]

I often find that European CEO's are paid substantially less than US CEO's for comparable companies in size. Why is that?  I am not fully sure. Some observations and who is really at fault in the US from my experience fighting some of this stuff.

 

But why is this wrong? The mere fact that there is a difference doesn't mean anything. A lot of people are operating on the assumption that a big difference between people's pay is wrong as such. That was the premise of the website I got the average CEO pay from: http://www.aflcio.org/Corporate-Watch/Paywatch-2016 and this website LongHaul just posted: http://work.chron.com/ceo-compensation-vs-world-15509.html. All that you can glean from these is that CEO pay is a lot more than employee pay. And that's it. It's too far from equal. Things need to be more equal like they are in Germany. The CEO and the employee in America might both enjoy a higher standard of living than their more equal counterparts, but this is not considered relevant to the analysis. Why should equality be the ideal? People are different. They're going to produce different amounts of value. That's a metaphysical aspect of reality. The earth rotates around the sun and people are unequal. Why should we want everyone to be more similar and how can it be wrong when they're not?

 

Some have made the point that CEO success is just due to lucky outside factors:

Becoming one of these CEOs is akin to winning a lottery,  similar to having a hit record, or being a top tier athlete, or actor.

 

I just think so much of a company's results are based on luck that paying such a high multiple to the average employee is irrational.

 

The average worker's salary has been pressured by globalization, automation, and an increasing labor force (through early 2000's). CEO earnings have historically been tied to size of the firm (revenue, market cap), which outside of economic depressions usually rise monotonically in aggregate.

 

If CEOs didn't earn their success, it's not so bad to take it from them ("You didn't build that"). But the fact is that there are always outside factors in everything you do. All it means to be responsible for an outcome is that your actions were under your own control and you knew what you were doing. To earn something can't mean that the results are entirely of your own making every single step of the way without outside influence. Otherwise, no one earns anything. The concept of earning would have no meaning. Ballmer is responsible for the Nokia acquisition- the choice to acquire was his. As randomep said, Warren Buffett did earn his money. He made the investment choices. It doesn't matter if luck helped him along or hindered his performance. If the government nationalizes BNSF, Buffett is responsible for the loss to Berkshire shareholders because he made the choice to buy it. It doesn't matter that Buffett was born in the right century etc. All that matters is that he made the choices to capitalize on these facts.

 

It's scary to me how much press inequality is getting. It feels like I'm constantly assaulted by it. There are gender gaps of every type. There are racial gaps. There are economic class gaps. There are some-parents-read-to-their-kids-more-than-others gaps (http://www.abc.net.au/radionational/programs/philosopherszone/new-family-values/6437058) Gaps gaps gaps. The gap mentality focus on equality is exactly the opposite of Buffett's inner score card. It's an outer score card that creates envy (the worst sin according to Munger). The more successful have a supposed obligation to give to the less successful in order to reduce inequality. Successful people become an affront to justice in the eyes of the less successful and envy/resentment is the result. Those above average see the entitlement and either feel this is unjust (creating resentment in return), or they feel guilty for not doing what they're "supposed to do". This is not a recipe for harmony. Inequality doesn't cause social problems. The belief that inequality- a fact of reality- is wrong causes social problems.

[Jurgis]

It's scary to me how much press inequality is getting. It feels like I'm constantly assaulted by it.

 

Right. It literally assaults various Dons. Even socialists like Kochs are talking about it. What is this world coming to!

 

https://www.washingtonpost.com/news/wonk/wp/2016/08/01/i-dont-like-the-idea-of-capitalism-charles-koch-unfiltered/

 

Billionaire businessman, philanthropist and political donor Charles Koch grabbed headlines this weekend for focusing a semiannual gathering of wealthy conservatives on a surprising topic: income inequality.

 

Inequality doesn't cause social problems. The belief that inequality- a fact of reality- is wrong causes social problems.

 

It's good to be the King!

 

 

I'll just end up with a quote from Koch:

 

KOCH: How do we have a society that maximizes peace, civility and well-being for everyone? How do we have a system of individual rights in which people succeed by helping others improve their lives? We're a long way from that.

[Guest]

Inequality doesn't cause social problems?  ???

 

If people don't have food to eat or a place to work that will cause problems.

 

 

I don't think many folks mind there being a gap. I think they mind the gap growing at insane rates for no apparent reason other than greed. If a CEO who doesn't take the brunt of the risk (even if he or she fails, a huge payout still happens) but gets the biggest single return (big payout if fired or even bigger payout if plan is successful) vs the stock holders who are risking their capital to hopefully average somewhere between 7%-12% long term. Why is is "right?"

[DTEJD1997]

hey all:

 

I think the primary factor in the egregious CEO pay is the fact that ownership of capital is so dispersed.  You've got individual investors, pension funds, hedge funds, sovereign funds, and on and on....The managerial class acted in their own interest and have "captured" the capital and pay themselves well. 

 

What needs to happen is that the owners of capital need to RISE UP.  They need to become more engaged.  Owners of capital need to engage management and demand why is the pay so high when results are so bad?

 

 

[DonFanucci]

Inequality doesn't cause social problems?  ???

 

If people don't have food to eat or a place to work that will cause problems.

 

 

I don't think many folks mind there being a gap. I think they mind the gap growing at insane rates for no apparent reason other than greed. If a CEO who doesn't take the brunt of the risk (even if he or she fails, a huge payout still happens) but gets the biggest single return (big payout if fired or even bigger payout if plan is successful) vs the stock holders who are risking their capital to hopefully average somewhere between 7%-12% long term. Why is is "right?"

 

When people don't have food or a job that's poverty. Inequality is difference. Warren Buffett and the millionaire next door are massively unequal but neither are poor. Americans probably enjoy the highest standard of living in world history, and while poverty can still be a problem, the existence of differences between people is not. If someone who should know better (like a public intellectual) is making the false equivocation between poverty and inequality, they are using a trick on you. They are counting on you having only a fuzzy understanding of what they're saying.

 

I'm just repeating myself now but if two people are swimming poorly and one starts swimming well, the insane growth of the swimming gap is not a problem. It's indicative of progress. Do you think China got more or less equal as millions of people lifted themselves out of poverty? That pay structure you bring up is just a risk that some companies are willing to take. It doesn't always work out, but it is fair in that everyone involved has voluntarily consented to the arrangement. A CEO's job is incredibly important and so companies are willing to pay big bucks/take risks to get a rock star. $12.4 million in total average comp on a $45 billion average EV company does not seem out of line with the value they're responsible for. If they increase the EV 1%, or $450 million, but are only paid $12.4mm, how is this fair? Well, it's fair because that's the agreement they agreed to. They are free to leave. If you don't like the CEO compensation, vote against it or sell your shares. That's the arrangement you agreed to when you obtained title to the shares.

[LC]

This is essentially where government needs to step in and tax.

[wachtwoord]

This is essentially where government needs to step in and tax.

 

A whole world of NO! Don't steal from people better off than you because you're jealous! That's extremely petty and pathetic. Take a look at yourself :(

 

Please don't tie the legs of the best swimmers. No one will try to be a good swimmer anymore. I'm a good example. I give about 60% because I don't think I'll be rewarded for doing more.

[wachtwoord]

This is basically it: http://doc.cat-v.org/economics/bar_stool_economics

[bennycx]

This is essentially where government needs to step in and tax.

 

A whole world of NO! Don't steal from people better off than you because you're jealous! That's extremely petty and pathetic. Take a look at yourself :(

 

Please don't tie the legs of the best swimmers. No one will try to be a good swimmer anymore. I'm a good example. I give about 60% because I don't think I'll be rewarded for doing more.

 

Disagree. CEOs are types who would go for it even with less pay just because they're narcissistic and want control and power and show that they're in the lead. So they should be taxed since the demand there isn't elastic. If there is a high tax, I'm pretty sure a lot of people would still want to be a CEO.

[wachtwoord]

This is essentially where government needs to step in and tax.

 

A whole world of NO! Don't steal from people better off than you because you're jealous! That's extremely petty and pathetic. Take a look at yourself :(

 

Please don't tie the legs of the best swimmers. No one will try to be a good swimmer anymore. I'm a good example. I give about 60% because I don't think I'll be rewarded for doing more.

 

No what you say implies that shareholders can get away with paying lower salaries. Government shouldn't stick it's ugly nose where it doesn't belong.

 

Disagree. CEOs are types who would go for it even with less pay just because they're narcissistic and want control and power and show that they're in the lead. So they should be taxed since the demand there isn't elastic. If there is a high tax, I'm pretty sure a lot of people would still want to be a CEO.

[LC]

If the government (which is owner of the majority of the tangible/intangible capital in this country) charged market rate for this capital, the cost structure of our entire economy would be different. But they don't, as such we have massive inefficiencies.

 

For example, Walmart employees reduced to food stamps. The government is essentially subsidizing Walmart. Nobody would work these jobs if they all died of starvation in 30 days or so. As a result, Walmart increases their EV by a few % as Don alludes to, and senior management disproportionately benefits.

[Spekulatius]

Don,

 

Why do executives executives get paid 5x-10x (relative to the average employee) more than the folks who had the same roles in prior decades? I really think luck is a bigger factor than what people give it credit.

 

I think one of the reasons they are paid more is the technology. With private jets, smart phone, big data, etc, etc. A CEO can run a much bigger and more complex company than decades ago. It's like these mega sports stars, I don't think Lebron James is better thank MJ. However, with today's technology, he can sell to a much bigger audience and realize more value for himself. In today's world, it's more than ever winner-takes-all.

 

It's not that those CEOs create more value. They are just in the right position to take more value created by other factors, such as technology.

 

The same is true for everyone, even the lowest paid workers. I work  as an engineering manager (low level) and have some low level temp workers operating $2M pieces of equipment. It makes a huge difference in va,UE creation for the company, if they do the job well, but very little of the value accrues to them. They are truly seen as a commodity and being replicable, which is true to some extend, except that the replacement could be a screwup guy.

 

Yet, in the current economy, the value creation of some is not rewarded. My own take is that everyone is replaceable, which applies to CEOs as well. HAlf the CEOs That I worked for I'm my carrier did not make a whole lot of difference, I only, but they still get paid as if they did.

[Guest]

Inequality doesn't cause social problems?  ???

 

If people don't have food to eat or a place to work that will cause problems.

 

 

I don't think many folks mind there being a gap. I think they mind the gap growing at insane rates for no apparent reason other than greed. If a CEO who doesn't take the brunt of the risk (even if he or she fails, a huge payout still happens) but gets the biggest single return (big payout if fired or even bigger payout if plan is successful) vs the stock holders who are risking their capital to hopefully average somewhere between 7%-12% long term. Why is is "right?"

 

When people don't have food or a job that's poverty. Inequality is difference. Warren Buffett and the millionaire next door are massively unequal but neither are poor. Americans probably enjoy the highest standard of living in world history, and while poverty can still be a problem, the existence of differences between people is not. If someone who should know better (like a public intellectual) is making the false equivocation between poverty and inequality, they are using a trick on you. They are counting on you having only a fuzzy understanding of what they're saying.

 

I'm just repeating myself now but if two people are swimming poorly and one starts swimming well, the insane growth of the swimming gap is not a problem. It's indicative of progress. Do you think China got more or less equal as millions of people lifted themselves out of poverty? That pay structure you bring up is just a risk that some companies are willing to take. It doesn't always work out, but it is fair in that everyone involved has voluntarily consented to the arrangement. A CEO's job is incredibly important and so companies are willing to pay big bucks/take risks to get a rock star. $12.4 million in total average comp on a $45 billion average EV company does not seem out of line with the value they're responsible for. If they increase the EV 1%, or $450 million, but are only paid $12.4mm, how is this fair? Well, it's fair because that's the agreement they agreed to. They are free to leave. If you don't like the CEO compensation, vote against it or sell your shares. That's the arrangement you agreed to when you obtained title to the shares.

 

Again, perhaps I'm dense but I fail to see why the huge increase in the gap is justified. I'd imagine CEOs here are working just as many hours and just as hard as those in other countries and as the CEOs who came before. Why is it justified if a CEO fails, they get a huge payout? If the average work fails...well, better suck it up and find something else?

[wachtwoord]

Inequality doesn't cause social problems?  ???

 

If people don't have food to eat or a place to work that will cause problems.

 

 

I don't think many folks mind there being a gap. I think they mind the gap growing at insane rates for no apparent reason other than greed. If a CEO who doesn't take the brunt of the risk (even if he or she fails, a huge payout still happens) but gets the biggest single return (big payout if fired or even bigger payout if plan is successful) vs the stock holders who are risking their capital to hopefully average somewhere between 7%-12% long term. Why is is "right?"

 

When people don't have food or a job that's poverty. Inequality is difference. Warren Buffett and the millionaire next door are massively unequal but neither are poor. Americans probably enjoy the highest standard of living in world history, and while poverty can still be a problem, the existence of differences between people is not. If someone who should know better (like a public intellectual) is making the false equivocation between poverty and inequality, they are using a trick on you. They are counting on you having only a fuzzy understanding of what they're saying.

 

I'm just repeating myself now but if two people are swimming poorly and one starts swimming well, the insane growth of the swimming gap is not a problem. It's indicative of progress. Do you think China got more or less equal as millions of people lifted themselves out of poverty? That pay structure you bring up is just a risk that some companies are willing to take. It doesn't always work out, but it is fair in that everyone involved has voluntarily consented to the arrangement. A CEO's job is incredibly important and so companies are willing to pay big bucks/take risks to get a rock star. $12.4 million in total average comp on a $45 billion average EV company does not seem out of line with the value they're responsible for. If they increase the EV 1%, or $450 million, but are only paid $12.4mm, how is this fair? Well, it's fair because that's the agreement they agreed to. They are free to leave. If you don't like the CEO compensation, vote against it or sell your shares. That's the arrangement you agreed to when you obtained title to the shares.

 

Again, perhaps I'm dense but I fail to see why the huge increase in the gap is justified. I'd imagine CEOs here are working just as many hours and just as hard as those in other countries and as the CEOs who came before. Why is it justified if a CEO fails, they get a huge payout? If the average work fails...well, better suck it up and find something else?

 

Because the market offers it to them? To be honest I don't think they should have the golden parachutes they have but I don't own enough shares to make a difference. They deserve whatever the market offers them.

 

Also looking at the number of hours worked is incredibly naive. If I can add more value to a company than another employee adds in a year my hourly wage should be larger than his yearly wage. Sadly the world still rewards knowledge workers by the hour, causing people to add a lot less value (you're not going to be rewarded for it anyway, why work hard?).

 

[petec]

My view is that you can't decide whether the increase (or absolute size) of the gap is relevant until you understand what causes it.  A few ideas might be:

a) globalisation/technology = rising competition for "average" jobs, at least temporarily.

b) low interest rates.  CEOs get paid with stock options and stocks have probably been rising a lot faster in the last 30 years than they would have if rates hadn't gone to zero.

c) increasing institutionalisation of the shareholder base.  Fund managers earning millions probably don't find it odd that the CEO earns millions.

d) momentum.  CEOs sit on each others' boards and compensation committees.  There's a comparative/circular element to rising salaries.

 

How about the following:

a) CEOs can only be paid in cash and they must spend 50% of this buying stock at market, with a 10-year lockup.  Intended consequence: shareholders feel the true cost of pay, and CEOs have downside as well as upside, like a normal shareholder does.  (Unintended consequence: an amusing incentive to talk down your stock and not juice your earnings.)

b) CEO packages can only be approved if shareholders vote in favour.  Otherwise, they default to 100x the lowest full-time salary paid by the company.  Intended consequence: shareholder activism is more likely to work, and CEO's have a bigger incentive to engage.  (Unintended consequence: CEOs are a little more likely to increase their lowest wages.)

 

Not perfect, I'm sure, but maybe better aligned?

 

EDIT: to be clear the aim of this is not necessarily to lower the gap.  I have no idea what the gap should be.  My interest is: how do we set the right pay and incentives for a CEO?

 

[Jurgis]

How about the following:

a) CEOs can only be paid in cash and they must spend 50% of this buying stock at market, with a 10-year lockup.  Intended consequence: shareholders feel the true cost of pay, and CEOs have downside as well as upside, like a normal shareholder does.  (Unintended consequence: an amusing incentive to talk down your stock and not juice your earnings.)

b) CEO packages can only be approved if shareholders vote in favour.  Otherwise, they default to 100x the lowest full-time salary paid by the company.  Intended consequence: shareholder activism is more likely to work, and CEO's have a bigger incentive to engage.  (Unintended consequence: CEOs are a little more likely to increase their lowest wages.)

 

Not perfect, I'm sure, but maybe better aligned?

 

I'll start with b) - how is this much different from current situation? Institutions vote "for" mostly anything on the slate and will continue to do so even if your proposal is adopted. The only improvement is the few "say on pay" proposals that got rejected would have real teeth. But will institutions be even more scared to vote against if rejecting proposal may mean that CEO says "screw it" and leaves?

 

You did not mention it in b), but you could also enforce a yearly voting: some companies now have "say on pay" every 3 years only.

 

a) is not bad, but unintended consequence is that CEOs will just double their salary so they take home the same amount of cash (and the rest goes into stock piggy bank).

 

IMO it's very tough to design a system that works against adversarial opponent (in fact there are provably unsolvable situations against adversarial opponents in game theory IIRC).

 

Ideally we should get to the level where CEO is not an adversarial opponent, but such cases are quite infrequent.

[petec]

I'll start with b) - how is this much different from current situation? Institutions vote "for" mostly anything on the slate and will continue to do so even if your proposal is adopted. The only improvement is the few "say on pay" proposals that got rejected would have real teeth. But will institutions be even more scared to vote against if rejecting proposal may mean that CEO says "screw it" and leaves?

 

Fair point.  Then, make voting on pay compulsory and implement automatic rejection unless e.g. 67% of shareholders agree.  Plus, institutional shareholders should have to report to their clients every year on which pay deals they voted in favour of, and why.  And yes, yearly.  Finally and more controversially, I'd consider requiring 50% of employees to vote in favour, too.  Probably not a good idea (I haven't thought through the unintended consequences) but interesting to consider - they will have as good an idea as anyone whether the CEO is good, and it will increase the incentive of the CEO to treat them well which, IMHO, is likely in the long term interests of shareholders. Ultimately I as a shareholder hire the CEO to control employee pay amongst other things; why not hire the employees to control CEO pay? 

 

If this is happening everywhere there's no incentive for a CEO to leave. 

 

a) is not bad, but unintended consequence is that CEOs will just double their salary so they take home the same amount of cash (and the rest goes into stock piggy bank).

 

Not if shareholders start voting, they won't. 

 

Ultimately the goal for me is not to reduce CEO pay per se, nor the pay gap.  It is to ensure that interests are aligned which they are clearly not at the moment (most glaringly because stock options=no downside risk and because institutional ownership=beneficial owners don't vote).

[Jurgis]

Not bad ideas.