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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.
Your mistake is thinking that this has anything to do with math. People aren't upset because the CEO's pay causes them to get underpaid, they are upset because it is ludicrously, wildly unfair to pay someone over 1000x what you pay the people who actually drive the company's ability to make money. It's a question of justice, not one of "how much would we benefit from cutting this guy's salary".
It's not about driving the ability to make money, it's about value over replacement employee.
A bad barista can ruin a lot of customer's days, piss people off, probably cause thousands of dollars of damage before someone notices.
A bad CEO can destroy a hundred million dollars of value, maybe even a billion, before the board removes them.
At those stakes, justice is not even close to the point. It's rational to pay that much because the swing in value caused by that single person is immense. The difference between a good CEO and a bad CEO is easily $100M just by itself.
A lot more than that, if they are Steve Ballmer. The difference between Ballmer's and Nadella's Microsoft is exhibit A in the case for "Some of our most talented people should be non-founder executives at legacy companies."
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It would be rational if there was any evidence that paying that much gave you any meaningful increase in how good your CEO is. But I don't think there is.
The evidence is that the company still exists.
I can't stress this enough -- a bad CEO can destroy the entire thing as an ongoing concern. The companies with those CEOs literally don't exist any more.
Insert the picture of the military planes coming back with the bullet holes.
No, I'm not saying that a bad CEO can't destroy the company. I'm saying that we do not have reason to believe that paying so much gets you a good CEO. Notably, even a CEO who destroys the company tends to get paid a bonus for his trouble. That is the exact opposite of rational, and so we would expect to see such clauses get eliminated, but if I'm right (and CEO compensation is driven by good old boys helping each other out) it is completely expected.
The reason to believe that paying so much gets you a good CEO is that companies that want to continue existing care about costs, and so if large compensation packages for CEOs didn't attract good CEOs, market forces would pressure them to offer lower compensation. So the fact that we continue to see successful companies pay CEOs a ton is reason to believe.
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Precisely.
The resentment workers feel towards the CEO is exactly the same they would feel if they saw Gruk take 1000x their share of mammoth meat in the ancestral environment. Okay, maybe Gruk is exceptional hunter who contributed more to the hunt than most, and deserves 2x the regular share, or even 3x if he is wise and respected and high status, but 1000x?! Nobody deserves that, it's unfair!
And in the ancestral environment, it really is unfair. Nobody is 1000x a better hunter than average. But in a modern economy, it is perfectly possible for an exceptional man to produce 1000x the value of a regular man. I'm pretty sure Elon Musk and Warren Buffett produce more than 1000x the value I produce.
I think another point is the workers in Starbucks aren't paid very much. Engineers are less likely to care about CEO pay than baristas because they baristas are essential to the operations of Starbucks but don't make that much thus the CEO getting 95 million off their labor is especially unfair.
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Elon Musk and Warren Buffet are bad examples though as they are Great Men, with a mythos and not easily replaced. Most CEOs are interchangeable faceless suits not visionary founders.
Yeah, Musk may be crazy and I was never a fan even back in the days when he was being worshipped as a god of tech, but he does have a Vision and a Plan. He does want to build electric vehicles. He does want to build self-driving cars. He does want to build private, reusable space vehicles. He does want to colonise Mars.
Most other high-paying, multi-million salary CEO jobs are "Tom Bimble left Wahoo! and has now joined MegaMart, replacing Tim Bamble who has gone to Wahoo!" Interchangeable guys who didn't found the company, weren't there for its rapid growth phase, and whose job is basically "don't run it into the ground, but even if you do, your contract ensures a golden parachute".
That's where the resentment comes in: I screw up in my job, I get fired. CEO Tim screws up, he is the cause of a lot of people losing their jobs, but the terms of his contract means he walks away with a million-dollar pension and may well walk into a new job.
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problem with the idea that CEOs produce 1000x the value the employees is that the CEOs are 1000x compensated as a rule, including those CEOs who don't oversee enermous successes but stagnation or drive the company to the ground. All well-paid until the end.
I think it is strongest argument that executives are not highly paid because their value is competitively assessed. It is a combination of a principal-agent problem and some kind of scope issues: executives are placed at the top of company hierarchy and control its day-to-day functioning whereas stock-owners are numerous and have relatively little direct input, which causes the principal agent problem. Because the executives are few in number, humongous compensation to few executives is only a drop in a bucket to large company, so they can get away with it.
It is a problem that probably can not be fixed in joint stock company capitalism, but perhaps benefits of capitalism are worth the costs.
Musk and Buffett, for the record, are not only CEOs. Neither is rich man because of their CEO compensation, but because they hold significant amount of shares in their respective companies. Buffett owns something like 30% of Berkshire Hathaway. Musk owns 15% of Tesla and majority of SpaceX.
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But is the CEO of Starbucks that man?
The perceived injustice is "He and the other execs get to vote themselves a 10% pay increase Because They're Worth It, at the same time they are slashing headcount because 'labour costs too high'. Belt-tightening somehow always means the guys on the shop floor, not the managers. And yet the managers get way more perks just for sitting at a desk".
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That is true but its also relatively rare. The vast majority of senior managers are extremely replaceable/interchangeable (not by anyone, of course) and the arguments for why their compensation is as high as it is could as well apply to anyone responsible for a system which's continued operation affects a lot of money, from something as lowly as system administrators to say the commissioner of the IRS (that apparently only makes some 200k a year).
A lot of the excessive senior managment compensation is friendship/class corruption and there are reasons beyond "justice" to care about this as well, like why the money isn't going to shareholders or reinvestment in the business.
Excessive compensation for labour is a bad idea. Driven and capable people should be incentiviced to start businesses and compete/disrupt markets, not capture positions for what essentially is rent extraction.
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The median ancestral human was a peasant farmer, and, inasmuch as we know the attitudes of the historical peasantry, they loved the nobles with 1000X their fair share. What they seem to have hated have been middlemen, merchants, etc.
The media ancestral human was a hunter gatherer.
Due to population densities, that isn’t true- most ancestral humans have been peasant farmers because hunter-gatherers had very low populations.
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Which is of course why there were more or less constant peasant rebellions until the industrial revolution...
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At least the nobility had the decency to look impressive....
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Our instincts are a lot more adapted to the vastly longer time we were hunter-gatherers than to the measly 6,000 years we spent as farmers.
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???
What exactly is the instantiation of value that you think Elon Musk and Warren Buffet “produce”? Scrimshaw?
I am, I suppose, an Elon fanboy in the sense that to get to Mars I would ride with Satan himself, but he doesn’t produce anything; he is at best a Schelling point around which (as @SubstantialFrivolity describes below) an engineering Old Boy’s Network rotates, but if it wasn’t Elon it would have been somebody (anybody) else, to no material detriment to the Mars project.
In fairness to the "Elon is unique" theory, he does seem to be a locus of "I don't care what problems you encountered, we're doing sci-fi shit, so shut the fuck up and figure it out" energy. This doesn't always work out, but it appears to be a load-bearing reason for why SpaceX is SpaceX instead of "failed aerospace subsidy farm #28".
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With most now-rich founder tech CEOs I could buy that. With CPUs, GPUs, OSs, social networks, whatever, there was a stable of plausible looking competitors and one caught a lead and rolled up into a progressively fatter cat that no other could compete with, network effects and all that, and maybe any one of them could have done just as well. ('anybody' seems a stretch, say, I'd most likely screw it up if asked to be a team lead of a team of any size. I might manage to manage a kitten but wouldn't bet on it. Very happy that tech companies have an IC track. And probably it takes a more select type to be a startup founder that doesn't fizzle out than, say, a Starbucks franchise boss or line manager wherever)
But SpaceX? Why would you expect some socioeconomic factors to turn up the same thing if there wasn't a idiosyncratic space maniac Elon driving it? There have been any numbers of attempts at space startups with comparatively incredibly lame results. Probably the most serious one has been Blue Origin where (if we believe the AI slop Google gives me for the search prompt) Bezos has likely poured in 100x as much of his own money as Elon did, and managed one (1) orbital flight so far, and some tens of 'hey we edged just over 100km so we can claim our tourists visited space' which tends to be peak space startup achievement. Is there any reason to think that swapping out Elon some random other boss wouldn't end up with at most a Virgin Galactic, instead of the wildly implausible looking outcome of first catching up with the established fat cat aerospace companies that had been doing this for decades at scale and made a giant government-funded grift of it, and then undercutting them on launch cost by 20x?
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Personally, I don't believe it's possible for one person to produce 1000x the value of another. I think that CEO pay is not driven by actual value provided, but from the fact that CEO compensation is set by boards of directors who are... executives themselves, so it's just a good old boys' network. But certainly whether you think the arrangement is fair depends upon if one thinks it is indeed possible for one person to provide that much more value than another.
I have numerous coworkers that produce negative net value, so it's possible to have one person produce infinitely (or undefined, or NaN, or whatever) more value than another.
But someone like Jim Keller absolutely provides 1000x more revenue to his employers than, say, an offshore code monkey in Mumbai writing JavaScript.
You, @sarker and @TitaniumButterfly have all made that point and I will admit it's persuasive. So I will amend my statement: it is possible for one person to produce infinitely more value than another, but only in the degenerate case where one of the people is doing nothing or is a net negative to productivity. I don't think it's possible for that to occur in a normal case (where both people are actually producing value), however.
It seems strange to believe that someone can have zero or negative marginal product, but not arbitrarily small positive marginal product.
In order for it to be possible, all you need is zero, you don't have to have arbitrarily small, because it is certainly possible to produce 1000 times zero.
But it's still nonsense either way because people here are depressingly literal. "Produces 1000 times as much as another employee" implicitly compares an employee to another employee whose production is acceptable. The fact that the words "... whose production is acceptable" are not literally there doesn't change this.
There's some places where people whose output is zero or near zero are quickly rooted out and fired (assembly lines?) but in many fields ZMP workers learn to camouflage themselves and fly under the radar from management's perspective.
Or, if you like, NMP and ZMP workers can have de facto "acceptable production".
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People aren't being overly literal. Including that comparison without making it explicit isn't a reasonable thing to do, because it brings it in without leaving it open for challenge.
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"arbitrarily small" is really just the hypothesized "this person accomplishes nothing" with different wording. That sort of mathematical language makes sense if you're doing a proof, but we aren't.
Nature abhors a discontinuity. You already agreed that an employee can accomplish nothing. How can it be that producing zero is possible, producing X is possible, but it's impossible to produce x/1000?
Effort, productivity, hours worked, talent - all these things are continuous variables. It's trivially obvious that someone who has little talent, low productivity, and slacks off on the clock can produce arbitrarily less than someone with talent, drive, and focus.
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The simplest explanation is that yes, corporations can gain such scale and power that paying the CEO 100 million dollars makes sense in a free market economy. Corporate officers are merely the highest-paid employees in a corporate structure and their salaries are not fixed by a mysterious cabal. If a board of directors could pay them less, they would and could. The ability and talent to grow a firm is rare: you can't hire Steve Jobs and Elon Musks off the street, and even if you can, you have to pay them for the opportunity cost of them not going off and pursuing their own ventures.
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Here are some examples:
X enters data from PDFs into a database manually. Y writes a script for it.
X creates a homebrew game that only he and his best mates like to play. Y creates a similar game, then finds niche markets for it, selling a few thousand copies.
X sells Girl Scout cookies by offering them to her family and neighbors. Y sets up a Girl Scout Cookie stand outside of a popular pot shop.
Maybe X produces more social and community value by providing cookies to family and neighbours than Y does by profiteering off potheads?
We are talking about value an employee brings to a business, which is more straightforward to measure.
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It is actually much worse than even @TitaniumButterfly is suggesting. There are Zero Marginal Product workers, but there are also Negative Marginal Product workers, those who actually reduce a team's aggregate output after joining (one example would be Ignatius J. Reilly).
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Plenty of people can't produce anything, so how does that math work out?
Technically undefined, I think? Because it would be dividing by zero to determine how much more someone is producing than that worker.
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