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I have a really hard time with CEO vs worker pay discussions. It kind of drives me crazy. Lets take Starbucks, since I'm currently hearing unions complain about the disparity right now. The argument mostly feels like math blindness, but maybe my problem is that I'm bringing an abacus to a knife fight.
The Starbucks CEO makes $95 million a year. They argue this is outrageous because their employees only make $20/hour or whatever.
Why not complete the math? What if we took the Starbucks CEO, fired him, and redistributed his $95 million a year a salary to the workers? Well, the 361,000 workers would see their pay bumped by about $1 per day. It's really hard to get across that the workers at each Starbucks already capture a huge portion of the value of the cup of coffee they serve (aside from real estate costs, cost of goods, etc). The Starbucks CEO takes perhaps a 1 cent from that cup.
This is a simple economic fact that seems almost impossible to communicate. Unionization won't improve worker pay on this front because there isn't much on a per unit basis that can be squeezed to give to workers.
I mean, the union could say lets increase the cost of coffee at Starbucks by 2.5x so that every employee can now afford a 3 bedroom 2 bathroom house in their neighborhood but then their competitors would eat their lunch. And customers might actually be pretty outraged by the idea of paying $18 for a blended coffee plus tip. So, the unions don't try this angle.
In my town a particular annoying version of this argument is happening regarding a company that distributes Pepsi products in the region. They somehow ended up with a union 50 years ago which includes a pension. The company recently announced they can't fucking afford to give employees a pension anymore for the very not valuable job of delivering cases of Diet Pepsi to 7-11s all day and they want to switch them over to an 401k. This was an enormous outrage and the delivery people have been on strike over this for a year now. Going by the town's reaction, they seem to believe thousands of dollars per case of soda being delivered are waiting to be wrestled away from the evil classists who run the company.
It never occurs to anyone to learn to do something more valuable. Just that they need to win the fight against the classists, a fight that could not change anything if they won.
How much unrest is actually caused by failure to reason through 9th grade math regarding your personal conditions?
Is any of this even about actually improving worker conditions? I know it's cliche to be skeptical of unions but I honestly don't understand their modern presence at all.
This feels like a Pascal's Mugging type of argument though. Or more specifically the petersburg paradox
Is there any specific reason to pay the CEO $95 million? It's not like there's a standard market rate for CEOs. It varies wildly and depends heavily on the subjective opinions of the board members. Why not go out and find another CEO for $200 million? A $200 million CEO should be even better than a mere $100 million one, right? Starbucks makes about $36 billion in annual revenue right now, so even $200 million is (like you said) a drop in the bucket. A mere 0.5%. If the new, better CEO can increase performance even 1%, he's worth it.
But then you can play the game again, and again, and again. There's no upper limit for CEO pay! Where does it stop? Their stock is kind of struggling right now- would a $10 billion CEO lead them to greatness? Or should they just cut costs and try to remain in their nice, small, profitable niche? Most sane people would say they should just stick to selling coffee, but you could do the math and imagine that even a 1% chance of becoming the next hot tech stock is worth gambling the entire company on.
Starbucks is admittedly a weak example for this. They have a lot of part time hourly employees, and they all get health benefits, so their biggest expense by far is already employee compensation. It just doesn't go as much to salaries.
For a different extreme, look at Tesla. 125,000 employees right now. Market cap 1.3 trillion. Elon Musk right now earns about 8$ billion a year under current conditions, but it goes up by 1% of Teslas total market cap for each additional trillion in their market cap. If he hits just the easiest goals, he gets $36 billion a year. If it goes up to 8 trillion, he clears an eye watering $878 billion in 10 years, almost $90 billion a year. (yes that's in stock, not cash, if that makes a difference)
Doing the same math as you, that could be ($90 billion)/(125,000 employees) = $720,000 per employee, per year. Is that still just a trivial cost? I dont' think so. In that case he's being given a large chunk of the company as his compensation. (And that's just the CEO, non including any of the other executives who also get paid a lot)
You could argue that in that situation he deserves it since the stock went up so much. But like... how do you know? How does anyone know? If some Tesla employee delivers full self driving while the government decides to tax gas cars and promote EVs, does Elon really deserve that much credit? Surely there should be some limit where we decide that a CEO is just too expensive, but there doesn't seem to be any mechanism in corporate America to limit it. Meanwhile, managers are very much incentavized to cut expenses, which heavily includes limiting employee salaries. There isn't any mechanism in the corporate structure to say "OK our stock didn't grow much. But on the plus side, we were able to consistently raise salaries for all our employees every year."
in history they sometimes talk about "the great man model," where history is heavily shaped by a few exceptional individuals. They mostly bring it up to disparage it, saying how history is far more complicated than just what people like Caesar and Alexander did. They'd be laughed out of the room if they tried to give all credit for an entire country to just one person. But apparently corporate leadership still believes in this line of thinking- they value the CEO far more than anything else. I can't help but worry that our largest corporations are under the control of middlebrow business majors who vastly oversimplify everything.
Musk's CEO pay at Tesla is uniquely generous even compared to other overly-generous CEO pay packages - to the point where the Delaware courts ruled it illegal. Tesla has the most liquid options of any single stock so it is quite easy to measure the ex ante value of Tesla share options. The pay package Musk "agreed" with Tesla in 2018 that was rescinded after it turned out to be worth $56 billion ex post was worth $2 billion ex ante back in 2018 - at a time when Tesla was only a $50 billion market cap. The number of public-company CEOs who made $2 billion from CEO compensation ex post is small enough to count them on your fingers. But even as the highest-paid CEO ever (by an order of magnitude) Musk made more as an owner than he did as CEO.
But the typical fat-cat non-owner CEO retires with a net worth in the high double-figure millions. Overpaid non-owner CEOs get a grossly disproportionate amount of public attention relative to how relevant they are to rising inequality, or falling living standards for line workers. I was particularly amused by the press coverage of Andy Jassy's $40 million payday as CEO of Amazon - none of which made the comparison to how much Jeff Bezos made off Jassy's work (about $80 billion, so 2000 times as much).
Would you agree that, even if in general CEO pay is not a major expense on their companies, there are particular cases where it could be, and Musk at Tesla is one of those examples? And it's interesting that he wa able to get it past the board and all sorts of normal shareholder protections, to the point where it required a court ruling to stop it. It's not some perfect elegant self-maintaining system.
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There is, obviously, or every CEO would already be making a trillion dollars a year. Specifically, they need to convince the owner(s) or their representatives to pay them that much. And the more money they pay the CEO, the less profit they make. Why do you think the board is any less incentivized to cut staffing costs than managers? They're the ones applying that pressure!
As for the actual reasons why the market looks like it does: I'm pretty sure the thinking is much more about ensuring you've got someone who's experienced and reliable enough to avoid any major corporate screwups (which can easily run into the billions) than attracting some business genius to lead the company to glory. But if everyone wants experienced executives with a record of reliability and no one wants to take a chance on someone who isn't there yet... Well, that's how prices get bid up.
These are not at all the same thing. They value the CEO over any other individual in the company, yes. But, as OP pointed out, they're paying him less than half of one percent of their total payroll. Sure, you can't reduce all of Roman history during Caesar's reign to Caesar... but I'm pretty sure you can attribute 0.5% of it to him. He did actually make a lot of decisions that impacted the lives of many Romans, many as a result of his particular circumstances. Upwards of 2-3%, I'd bet.
In general, the strong form of the case against the Great Man Theory is clearly false. Stanislav Petrov and Stanislav Petrov alone prevented nuclear war. Many times events don't neatly follow from the choices of any one (or even several) specific individuals, and sometimes when they do those choices would probably have been made by someone else in their place, but it's ridiculous to insist that's always the case. But I don't think most actual historians push the strong case; the point is just that other factors matter too, and often matter more. Which is in no way incompatible with thinking good leadership really does matter.
Musk is an outlier, for sure. But he's an even bigger outlier in terms of success. You can say he just got extremely lucky (twice, since SpaceX is an incredible success too), but I don't think that's where the balance of probability lies. Now, I'm not sure his compensation is reasonable even given that fact... which is why I haven't put any money into Tesla. (Well, I mainly haven't because I think other companies are quickly catching up, if they're not already there.) If more people thought like me, Tesla's stock would drop and he wouldn't get those huge bonuses... So there's your limiting factor. Clearly the people with skin in the game do feel he's worth it. They might be wrong, but it's their money they're betting.
No, that's not understanding it correctly. Petrov reporting what he saw faithfully wouldn't necessarily have resulted in nuclear war; it was the Soviet leadership's job to decide whether to launch on that information and it's entirely plausible that they wouldn't have.
Vasily Arhkipov is an obvious but-for case, but not Stanislav Petrov.
And as someone (I think it may have been later SSC poster John Schilling) pointed out in a long-ago argument on Usenet, it's possible that Petrov may have made war more likely -- now every time things are all quiet, there's always the lurking possibility in the leadership's minds: "Are things really peaceful, or is there really a missile launch and another Petrov-wannabe in the radar center is playing games with our inbound data feed?" Soviet leadership knew, or should have known, that military hardware can be flaky, but raising the possibility that the underlings can be lying is not a method likely to lower upper-level paranoia...
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It's a bit different though. The pressure to cut expenses comes from the top down. But there's no one above the board of directors who can hold them accountable- they're already at the top! Many of them serve on multiple boards at once, and rotate in and out of CEO or other C-level jobs at other companies, so they have a strong "class interest" in pushing up CEO pay in general. They might get some bad press or worker grumbling about unfairness, but there's no one that can actually fire them for setting the CEO pay too high. In theory I guess the general stockholders could all come together to do it, but they're so disorganized that it never happens. The only practical way to force them out is for some corporate raider to do a hostile takeover, and even then there's golden parachute clauses designed in part to preevent that sort of thing.
also worth noting that the ratio of CEO pay to average worker pay has massively increased over the last few decades. So it may well just continue to increase until they're taking home some large fraction of the company's total revenue as their personal salary. Or maybe the CEO ends up with all of the company's stock (making it harder and harder for regular shareholders to oppose them) and they become a private company, like SpaceX already is.
edit: most of the starbucks board members are current or former CEOs of other companies. They directly benefit from raising CEO pay, since that sets a higher baseline for themselves to justify their own pay. This isn't some abstract "class consciousness thing," there's a very small group of CEOs and board members who are tightly connected.
I wonder if he was awarded 1% of all the USSR's money as a reward for his services? That should be fair, right? Or did he not get anything at all? Our intuitions for what's fair really fail at this kind of scale. (edit: he was not rewarded. it was seen as an embarassment for the entire Soviet system and was quietly swept under the rug)
Well, this is primary mechanism in play. Board members are elected, but I'm sympathetic to the idea democracy doesn't really work. Principal-agent problems do happen. Many companies do have stock ownership requirements for board membership, but I guess the financial consequences of poor choices here could be cancelled out by your executive price-fixing conspiracy.
Fortunately, it's not the only mechanism: you can just choose not to invest in companies that you think overpay their executives. If you think that leadership doesn't really matter/extra CEO pay doesn't get you much better CEOs, that's profit just sitting on the table, and companies that don't do that will do better, all else equal. This information is publicly available, nothing's stopping you or anyone who agrees with you from creating a 'low CEO to worker pay ratio' fund. This doesn't instantly solve the problem, but it does mean it's not your problem. It's the shareholders who are getting cheated here, not the general public or the employees who, after all, have not been deceived: they were offered a certain product/wage for the money/work and accepted it. It's only the board's betrayal of their fiduciary duty to the shareholders that's dishonest.
Not totally clear to me why this is the case, but I don't think it's strong evidence of corruption. Maybe they were underpaying them before, or maybe something about the corporate landscape has changed that makes leadership that much more important, or suitable applicants have become that much more rare. The increase alone is insufficient to demonstrate there's a problem.
If this does happen, I think it'll result in massively worse performance. There's some leeway for inefficiency in successful companies, but enough to divert 10%+ of revenue into an empty pit? Either the executive really is that great (which maybe isn't impossible, but most certainly aren't) or they'll get outcompeted by companies that don't do this.
The USSR indeed had infamously dysfunctional incentive structures. His treatment was not even particularly bad by their standards. That's really not an argument for adopting them.
That said: not like any other nation would have paid out that kind of money for equivalent actions. A medal would have been entirely appropriate; hell, he'd have been a far better candidate for the Nobel Peace Prize than most of its recipients. (And he did in fact receive various lower profile rewards from some Western organizations.) But a cash prize comparable to the amount of value he preserved? No way. The Soviets did spend an enormous amount of money on nuclear launch detection (the fact it didn't work notwithstanding), but offering huge rewards for correct judgements in these situations would provide the wrong incentive: why would you ever say the detection was genuine? Either it's a false alarm and you get the award, or you've got half an hour to live and it's not going to matter to you either way.
(And there's a more generally applicable takeaway: there's a difference between fulfilling a prior agreement and dolling out rewards case-by-case after the fact. The latter can be worth doing, but the former is obviously far more reliable, and reliability is the most important thing in leadership.)
Well, I can't, because I'm not a finance genius who has devoted my life to picking stocks. My money is mostly in simple index funds, because (a) that's what everyone assured me was the smart thing to do and (b) those are simple and convenient for me to use as a regular person. My company 401k plan never offered me a "basically the S&P 500, but avoid stocks that overpay their executives" fund. Most other normal stockholders are in the same situation as me. I don't even get a chance to vote on proxy votes, since my share votes are handled by the index fund managers. And even when I did own individual stocks in the past, and I got a proxy vote as a regular stock holder, my vote was so small (a few shares out of billions at a blue chip company) that it didn't seem worthwhile to even mail it in. I had less power to influence them as a stockholder than I do to influence the US government as a voter, and that's a pretty low bar.
And most other players can't do this sort of thing either. Rich people might have their money tied up in stock for the company they worked for. Finance managers have to convince the rich people they work for that they're doing a safe, normal strategy. Hedge funds have to follow rules that mitigate risk for their institution. And most people just aren't interested in this sort of thing.
Ok, in principle there's room for some young Warren Buffet type to make his name by finding these companies, shorting them, and outperforming the market. But only to the extent that their excess compensation takes away from every other factor going on, and his efforts to short the stock would be countered by everyone else shovelling money into it. As long as the executives keep it below a few percent, it would be hard to notice.
But think about how far this has gone. It's no longer "the executives deserve this much money because it's what's best for the company." It's "they can pocket hundreds of millions without hurting the company in a way that anyone steps in to stop them." You could make the same argument for how a retail cashier could get away with stealing money out of the till, or how a middle manager could get away with embezzling from the accounting department, but for them it's illegal and there are protections in place to stop that sort of thing.
All of this to say- the market is not some omniscient, perfect entity. It's mostly efficient, but there are still plenty of efficiencies. I think there's a tendency among shape-rotator type people to assume that it's perfectly efficient because that makes for a much more elegant argument, but the reality is a lot more messy.
Also this:
I would argue that the executives, especially the CEOs, are being disengenuous here. They're not just some shmuck working behind the scenes, they act as the public face of the company, for both its employees and the general public. Their personal life reflects on the company just like a politician's personal life reflects on his country. When the CEO tries to make himself seem like a moral paragon when he's obviously just there to grab as much cash out of the company as he can get away with, that's going to demoralize every single employee and tank their performance far beyond the actual cash impact of his salary.
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Who's "we"? What does this "we" have to do with it? What would it mean for this "we" to "decide"?
I can certainly think of mechanisms in corporate America by which individuals can "decide" that they think a company is wasting money on a CEO and take actions based on that decision. If enough of them do, then I guess maybe one could call that group a "we", and the results can range from simply insulating that "we" from any negative consequences to providing a signal to directly causing a change.
I think your response actually supports my point. In theory "we" the stockholders could cut their CEO's pay, or "we" as voters could pass a law limiting all CEO pay. But in practice, no one is organized enough to actually be able to do anything about it. The CEOs get their pay not because some perfectly efficient market is finding the correct value for them, but because they have more political power where it counts.
This seems like something that "we" the stockholders can do. There are stockholder votes. Moreover, if "we" the stockholders "decide that a CEO is just too expensive", then "we" the stockholders can sell (or even short) the stock. No need to be organized about it, either. It's more likely that you just find yourself in a situation where many other stockholders disagree with you, and so you are not, in fact, a "we" that has "decided". You just "decided" on your own and want to imagine that you have a "we". You might even be upset at the fact that you don't have a "we", and so come up with things like....
And here is the rub that I figured you were getting at. What does the general population of voters have to do with it? Should the general population vote to "decide" that some company's investments in AI are "just too expensive"? How about the bill they pay for janitorial services? "Just too expensive". Or anything else? Why should it be across the board? A CEO could be massively "just too expensive" for Starbucks, but downright cheap for another company. You'll probably screw up both cases with a naive law like this.
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For context, 18th century enlightenment universalism focused on "socioeconomic factors" and described people as interchangeable stereotypes. Romanticism/counter-enlightenment pushed back with worship of genius (elevated by Eduard Young in 1759) and great men's ability to overcome fate. Carlyle praised hero-worship for teaching the necessary lessons of heroic leadership men need to stand up when the occasion arises to be great. While our lifetimes have seen the prior model reign again overall, in business the concept of heroic leader survived even the managerial revolution.
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One possible way to explain exorbitant CEO salaries would be conspicuous consumption on the part of the company, especially to attract investors.
"Look at us, we are paying 100M$/a to our CEO, not necessarily because we believe that the marginal dollar of his salary is a good investment, but simply because it is a performance expected of us, and paying less would signal to our investors that we are not a solid company to invest in."
If you are king, and there is a widespread belief that good kings keep war elephants, then that is a great reason to spend huge sums to keep war elephants, even if you privately believe that spending the money on infantry would be more efficient.
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Yes, that's a huge difference, mostly because the stock is only worth anything if the CEO does a good job of running the company. This can cause problems as well, such as CEO taking measures to juice short term sugars process at the expense of long term corporate health, but is a standard way to align incentives.
Tesla is also a special case because the CEO is also the principal founder and largest shareholder by a considerable margin, so it is to be expected that his interests and the company's will align.
i mean, i'm happy to take my salary in the form of corporate stock if that would 10x my compensation... but regular employees don't seem to get that option.
Even if you were prevented from selling it for several years, at which point it may or may not be worth anything? Most people need actual money to live on in real time.
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For the average Joe, stocks are a white elephant gift. When and how does he sell them? Does he take them to his bank? Does he have to go find a broker? How does he track the taxes on it? It’s a world he’s never seen before, knowing only paychecks and bank accounts.
You can transfer them to an etrade account or similar and sell them using the web interface. The mechanics of self-service stock selling are trivial.
Taxes can be automatically handled by selling a portion of the stock at vest for taxes. This is again a button on a brokerage web interface.
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It's pretty standard in tech to have stocks as part of your compensation even for entry level positions. I would be surprised if no other highly compensated industries did that. Now, the question is, are the workers at these companies "average Joes"? Dunno. But they probably don't count as elite corporate supermen either. There's way too many of them, for one. (Something, something, if everybody is super, nobody is).
He logs into the website of the broker company contracted by the corp to manage stock grants and clicks the "sell" button.
Well, that depends on your country of residence. For example, in one country I'm familiar with, you pay a flat tax on the sale price of any stocks you obtained as part of your renumeration, at the end of the fiscal year in which you sold. There's like an extra form to fill.
In finance it is part of the deal at mid-levels and above. As a quant VP I get my bonus in cash, but a VP-level trader or corporate financier would be getting part of their (larger) bonus in RSU's, as do my bosses at director and MD level.
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For my stocks, at the moment they vest (a taxable event) a fraction of them are sold and the proceeds are given to the IRS as tax withholding. This is pretty common in the US.
No extra forms. It goes on my W2.
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I mean the white elephant thing depends on vehicle. If you're fortunate enough to work for a large liquid traded firm it's easy enough to redeem but for a lot of other people it's nebulous startup equity options kinda stuff or privately held firms where it's a mess
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I am not saying you cannot criticize the CEO's pay package. I'm simply saying his high pay is not at any realistic expense of the rank and file employee. It's irrelevant to the economics of the Starbucks barista's local monkeysphere. You may as well be complaining that athletes get paid too much for playing sportsball.
Then you should also consider that part of his high pay is also in keeping expenses low, so there is in fact an antagonistic relationship there. If starbucks was forced to use all of their profits to pay employee salaries, the board would probably expect to pay the CEO a lot less.
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