Wealth and earnings inequality is a serious issue in this modern world and it's ridiculous, some people are more efficient than other people, nobody is 100x more efficient than anyone else. Take an arbitrary dude off the street and give them the experience of a CEO and I bet you that substituting him in would at most lose the company 40% of growth/whatever.
So CEOs just get paid more period. And there's this funny set of myths as to why that is the case. In reality, I think it just boils down to the fact that humans sort of instinctively (or maybe culturally?) like the idea of royalty. And so we're okay with some people just getting more for no good reason other than the fact that they're somehow anointed or divine.
It’s a helluva deal they got going.
What is true is the myth of individual efficacy. That a good CEO will have a successful company, and that a successful company is a sign of a great CEO. The reality is obviously that there are countless factors that affect company performance.
It's not that people think they are special, it's that we are very bad at correctly apportioning responsibility, especially when there is also a power imbalance that extends to determining that apportionment itself. We don't instinctively seek royalty (as in we assume leaders are special as a rule, though obviously in some contexts/positions we do), we seek simplicity (and pinning everything on a single leader is about as simple as it gets).
Until they don't: https://en.wikipedia.org/wiki/French_Revolution
You said, "nobody is 100x more efficient than anyone else". This is a reasonable (though not strictly true) statement by itself. But the implication is wrong - nobody needs to be 100x more efficient/effective to justify a 100x pay differential.
Consider an example:
* Company earns 1 billion per year.
* Normal-Person will increase profits 5%.
* Super-Exec will increase profits 10%.
--> Note that Super-Exec is only 2x more effective at increasing profits than Normal-Person.
Let's imagine we can hire Normal-Person for $100k. How much does Super-Exec have to charge to no longer be economical?
The difference in company earnings between the two is $50 million. So Super-Exec can charge up to $49,899,999 and it'll still be economical for the board to hire him. They'd be throwing away money if they hired Normal-Person when Super-Exec is willing to work for only $45 million.
These numbers are made up but in the same scale as how a big company really operates. The critical fact is that when the base amount of money being managed is huge, tiny differentials in performance translate to huge dollar values and boards are willing to rationally trade a large chunk of those values to execs in exchange for that performance.
This is a conflation between an important position (being able to resolve disputes and push decisions and direction) and being an important person. CEOs have skills, and have invested heavily in training those skills (if they aren't terrible) but those skills are not skills unattainable to the normal person, society just doesn't need very many people with those skills and the apparent value those skills create via business decisions appear to pay off handsomely. But that $50 million the exec's decision has made for the company isn't solely due to their work, if the company didn't have programmers and labourers and marketing and manufacturing to support the decision and deliver on the decision then that $50 million wouldn't have been earned.
Their decision is important, but their involvement isn't worth the full value the company receives based on making that decision, because without the supporting labour their decision may have been genius, but it would have netted no profit to the company. I think this sort of highlights what I consider to be a real issue with how we evaluate personal value in the modern world and why assets are becoming so concentrated in the hands of so few.
Noise.
Super exec might increase profits by more than normal exec, sure. How are you going to identify them? There's actually no way. All the ordinary selection criteria cannot be sensitive enough to sort the wheat from the chaff. Prior experience? They probably only had the job once. Recommendations? Passing the buck. Whiteboarding? LOL.
Chances are you will end up randomly picking out of a group that's mixed super and normal, and chances are you will end up with normal.
If you pay for super you will almost surely be overpaying.
* Normal-Person will increase profits by 5% and will dutifully inform the media of those gains
* Super-Exec will increase profits by 5% and will give a charismatic interview leading the market to believe that profits may increase by 10% the next year, which is reflected in an outsized 30% rise in the price of company stock
The board will hire Super-Exec for $50mm/yr because they all hold stock in the company and are thus more interested in the stock price than in the company fundamentals.
I've always wondered what it would look like if were were paid in multipliers instead of salaries. The lowest would get 1x, middle folks 5x, and CEO maybe 20x. The usual "a rising tide lifts all boats" mindset.
https://www.whalingmuseum.org/learn/research-topics/overview...
I like that idea!
> I'd wager most lower income folks would take the money, since that's food on the table.
Instant gratification is a large reason why lower income folks stay poor. (As for "food on the table", lower income people "invest" in lottery tickets. They clearly do have discretionary income.)
No? Thats one of the problems. Over the larger industry pool, and controlling for volatility, executive pay doesnt actually reflect company performance. Theyre closer fund managers hyping beta and past hits, but underperforming the averages.
That experience takes decades of results to earn which is precisely why they're worth so much. Of course it's meaningless if you can magically train anyone else that easily.
>> at most lose the company 40% of growth/whatever
That would put most companies out of business. Would you like your employer to lose 40% of their staff?
>> nobody is 100x more efficient than anyone else
Yes they are, you just haven't worked with them. The networks and wisdom the top people build up is what helps them lead companies and make decisions for 1000s of employees with billions at stake. What they can do with a few phone calls can easily surpass the output of 100 startups.
This article is also talking about the TOP companies which obviously requires top talent. This is nowhere near the average and these salaries reflect the immense stress and responsibility that comes with the job. If you think you can lead a company this large that easily then you really do not understand what the position entails.
Most arbitrary people will crumble under pressure if they are given the experience of a CEO.
Let's take a scientific perspective of performance, ie using evidence to decide which hypotheses to believe.
If we have a situation that's repeatable, say in professional sports, we have a pretty useful basis for deciding who is better. For example a pro soccer player has his entire career recorded by the second. Every touch, tackle, sprint, shot, and so forth is recorded. On top of that the conditions are similar across matches: the point is to win. This is highly repeatable, noise can be removed by having many experiments.
What does a CEO do? Well they mostly do things that aren't replicable. If your company launches the iPhone, they aren't going to do it more than once. If they miss the boat, catching up is a different condition to leading. If the economic cycles turn, the CEO's time at the helm will certainly not last enough cycles to tell whether they are good at weathering such storms. In fact decisions that CEOs make tend to be rare and unrepeatable. Did Marissa Mayer have to be skilled to sell Yahoo? Well nobody else has been allowed to try, so we don't have a lot to compare with. Did she get a good price? Well she only did it once, so we don't know.
In fact it is a lot easier to ascertain that LeBron James and Cristiano Ronaldo are at the tops of their games than any CEO. Do they score a lot? Yes, and many other dudes have tried. Are they effective compared to opportunities? Yes, and the stats say so.
Coming back to the CEO vs man on the street, I get the feeling a lot of CEOs are quite replaceable. Their firm is in some business, and there's a few strategic decisions to make. If you have multiple parallel universes, it's possible the CEOs would make the best choice more than the man on the street. But you'd certainly find men on the street who'd also launch the iPhone if given the chance. Now consider people who are reasonably close to senior management but not yet there. Would they make similar decisions? They certainly cost less.
By contrast it is glaringly obvious when a man on the street tries to play a sport. It's even obvious when a pro who is less good tries to play against a superstar.
The stockholders of Kodak, Blockbuster, Toys R Us, Radio Shack, Payless, Lehman Brothers, Bear Stearns, Enron, Worldcom, Tyco, DeLorean, TWA, Pan Am, and Arthur Anderson might beg to differ.
I believe that in many cases a bad leader can cruise on the success and momentum of an already smooth-sailing company, and similarly a good leader can fail to turn around a sinking ship. Who knows to what extent company performance can be linked with CEO ability or efficiency?
Yes, some people are simply 100x more effective than others.
You're looking at the compensation for CEOs at top firms. If a CEO does poorly then the company stops being a top firm and falls out of this consideration. Meanwhile every large company has good and bad average employees. Them doing poorly doesn't sink the company.
>Take an arbitrary dude off the street and give them the experience of a CEO and I bet you that substituting him in would at most lose the company 40% of growth/whatever.
And then you replace the rest of upper management in the same way and you won't have a company left. Also, 40% for these companies is a hell of a lot more than what these CEOs are paid.
Also, losing 40% of growth would be pretty awful for anyone who has company stock (employees, 401ks, investors) especially if that's year over year.
The challenge, obviously, is that CEO pay is a market and the current, insane pay scale has emerged from it. The only way for it to change would be a) regulation (good luck to the enforcers), b) a global moral awakening among CEOs that causes a sufficient majority of them to abandon their salaries willingly (ha), or c) labor unions, where extortion over pay becomes bidirectional (rather than the traditional CEO->Worker shit flow).
In any case, people tend not to care much about CEO pay until the company stops paying workers' bills and keeps padding leadership's massive fortunes. People will accept insane wealth inequality so long as it doesn't come at the cost of their personal livelihood. Easiest way for CEOs to keep making idiot money without political costs: lead well enough to keep your workforce employed and reasonably paid. Literally the bare minimum expected of the title.
Some estimates say their failed game, Titan, cost about $50mil to develop. If their CEO dropped his salary to a modest $1mil/yr, he could essentially fund a new game every 2 years.
This is of course an over-simplification of the value of money... dollars don't magically turn into hit video games. But they do help.
There are far, far more effecient video game studios/publishers out there.
Nintendo manufactures and ships millions of hardware units in addition to producing/publishing games and they have fewer employees.
Imagine trying to convince your employees you should appoint a boss, at the top of the company. Everyone will give up $3k, and this one person will make $28 milion a year.
I think losing $3k and gaining $3k are the same - but obviously the perception is different for something you 'have' vs something you might get.
The average S&P 500 corporation is worth $45B and grows earnings by 10% each year. The average S&P CEO gets paid $13.5 million dollars.
It's reasonable to expect a great CEO to grow earnings by 1% more than their average counterpart. If so, they are responsible for $450M/yr of value creation. $13.5M is a small fraction of $450M.
I'd believe in such thing if they were on long-term 10 year schedules and other mechanisms to avoid such manipulations.
Steve Jobs was. Apple was sinking into the muck with a series of CEOs, then put Jobs in the role. Jobs turned the same company around with the same resources and the same employees from a nearly bankrupt company to the biggest company in the world.
That's leadership of ONE man.
The upper middle management strata is stuffed with exceptional people and the skillset to be a good CEO isn't actually that rare; it probably isn't a supply issue.
I've worked in companies where the market and the stage of the company put the pool of possible CEO candidates at a number that could be counted on one hand.
I don't know anything about the video game industry or these CEOs, but I can't immediately assume they are overpaid. There are a lot of questions I'd need answered.
[1] Rules for Rulers: https://www.youtube.com/watch?v=rStL7niR7gs
How exactly is it a problem? Surely we'd rather overvalue CEOs than under-serve them?
> these payouts are totally asymmetrical and completely independent of how effective a CEO is
What are good metrics for this claim? How should we measure effectiveness-salary ratio? Why should they not be asymmetrical?
Just curious and trying to clarify the points being made.
> completely independent of how effective a CEO is.
It's not for you to judge that, it's for the shareholders to.
And it will end there.
Video games are more like movies than they are like other kinds of software, and the labor to produce them should resemble the movie business - not the software business.
That means a bunch of union members get hired for the production itself, for the duration of the production - not "indefinitely" for the distributor like they are now - and when the game is done, the production company for that individual game and all its labor is disbanded, and then everyone finds another production - possibly from a completely different distributor - to work on.
Except they'll all know this upfront and they'll be unionized, which mitigates the downside (ex: they'll get their health insurance from the union, not from Sony or EA or whoever.)
Fields that have cachet like show business and gaming will always be the last to have workplace issues of all sorts.
Every discussion of game unions I see here tends to have a lot of people talking about how they are quite happy with their financial compensation at their non-game job, and how they don’t want to unionize because what if it was a shitty union?!?
Also, Hollywood is kind of one of the major bastions of strong unions in the US. There’s a lot of entertainment unions in show business.
(My favorite example: compare the conditions of folks at union 3d animation gigs with the condition of folks in the non-unionized VFX world; better pay and more stable jobs for pretty much the exact same skills.)
https://en.wikipedia.org/wiki/2016%E2%80%9317_video_game_voi... <-- there's no equivalent in the startup/web industry.
This is precisely the environment where unions emerged. If individual workers had a lot of leverage, there would never be a need for unions.
I know back when I was in the industry I would have killed for a organization like what was available in film.
- Non-compete agreements
- Forced arbitration
- Wage fixing (such as Google, Apple, etc. used to do)
- IP ownership agreements (even when not using company equipment or time)
- H1B visa abuse
- And many more
Maybe it's also a marketing problem, don't call it a union, call it a guild or association.
Anyone who spent a couple of years in a corporation will know that meritocracy does not dictate career advancement or compensation. I think the tide has turned in the past years and the 'veterans' are starting to feel the ageism and the new fantastic coders aren't as thirsty drinking the kool-aid.
IE, to keep out immigrants, newbies, and people without degrees.
But over the last 10 years or so, there has been a huge influx of new people into the tech industry, and we are starting to outnumber those from traditional backgrounds who would have tried to prevent us from getting a job in the industry.
A bootcamper isn't going to join a union that would have outlawed their ability to get a job. An immigrant isn't going to join a union that would have them deported.
Instead, we will defect and sabotage those efforts, every step of the way. And there really are quite a lot of us in the tech industry, from non-traditional backgrounds these days. And we are smart enough to fight efforts that would have us fired, or that would pull up the ladder behind us.
And although still considerable, the U.S. doesn't have the same competitive advantage in software anymore. The market is now global - e.g. in 2018 38.5% of StackOverflow traffic for top 30 countries came from Asia-Pacific, while only 32.9% from North America.
I will absolutely and unequivocally reject them, in almost any form. I would not be here today if software jobs were broadly unionized, and I will not allow myself to become that hypocritical.
The pay is pretty good, use it to buy insurance and investments. If your part of the industry is seasonal or project-oriented, line up other work in advance.
Owners eat sleep and breath their company in a way the average salaried employee plucked at random from +10,000 employee company will not. To the points made by other comments, the CEO is entrusted to make decisions that can ripple through thousands instantly. The amount of value they can create or destroy in an instant is probably roughly in line with the multiple they are paid over the average employee. Thus their negotiating leverage is high and equity holders are happy to pay the price.
Said differently, if you owned all the equity of Google, how much would you be willing to pay to ensure that equity is protected? I think that number is more than 10x the salary of the average Google developer.
This is subject to the laws of supply and demand like any other system and it is pretty rational.
If CEO pay is a rational outcome of protecting the equity in a company, and CEO pay is too high, does that mean there's "too much" equity?
There's some evidence that income inequality is bad for society in some ways, which I tend to agree with if it means inefficient/uneven distribution of resources/opportunities/community investments. In this sense, and considering the previous question of "too much equity," is it possible that a company's market value can be too high?
Why is Board so obsessed with credentials? Is it because they want to play it safe (kinda like dumb execs choose Oracle over open source solutions because they want to protect themselves from criticism by going with a famous brand)? Or is it because those credentials are truly imporant for the success of EA?
I don't know for certain but I suspect the answer is kinda in between. The quality of a CEO candidate is really hard to judge. So the Boards think like this:
> We'll screen for all the obvious things (experience, references, track record, culture fit, etc.). Hundreds of people will pass that screen. We have no clue of how to choose among them, so we might as well go for someone who's done it before. Perhaps we don't need to be so restrictive. But there's a chance it actually does matter, say maybe 10% chance that a person who's been a top exec before will do better than candidates without such credentials. A good CEO can increase corporate value by billions of dollars over a few years, so even a 10% chance is worth a lot. So let's go bid for one of those bigshot ex-CEOs, even if that means we have to pay an extra $20M/year.
So in some sense, high CEO pay is due to the "religious" belief that whoever made it to the top is super good.
Maybe this religious belief is actually rational, maybe not. I kinda suspect the latter, since other countries seem to pay CEOs a lot less; I find it unlikely that the US CEOs have such unusually high skill compared to the rest of the world. But I don't have high confidence in my opinion.
That boggles my mind.. That CEO salary seems rather on the high side. I could have told them to "do another CoD" and rummage in the vault.
I think that's been falling apart for a while now due to fan backlash. Activision has never been very popular, now Blizzard fans have finally gotten the message that they are one and the same, reacting in overblown ways to mobile announcements.
EA struggles from the same reputation issue as Activision. The latest Battlefield was met with quite some hostility and afaik hasn't been doing very well commercially, while the last Mass Effect received luke-warm reception killing the franchise for good.
If it wasn't for that very smart PR move of keeping Apex Legends under wraps, until release, EA would also be in quite some trouble now. Particularly with Anthem underwhelming people everywhere, confirming the notion that whatever made Bioware special, is by now long gone.
Doesn't look that much better at Bethesda with their Fallout 76, after years of taking the fan-goodwill for granted, they've now managed to really piss people off.
Take2 and Ubisoft have mostly managed to pull through unscathed so far, but imho overall this is the result of indie development and publishing having gotten as strong as they are now. Nowadays consumers can choose from a wide selection of very high-quality games, often sold below the usual full-retail price and they've become very aware of it.
If the established big players want to keep their dominance they need to change their course heavily, show actual goodwill instead of constant willingness to exploit every commercial angle available.
The methodology "lists the 25 most overpaid CEOs, identifying the company, the CEO and his pay as reported at the annual shareholder meeting, and the pay of the company’s median employee."
Activision Blizzard's Kotick's $25M comes in at 306:1; Electronic Arts' Andrew Wilson's $35M is 371:1 .
Ronald F. Clarke of Fleetcor Technologies Inc is a generous 1517:1.
Is this a reasonable assumption?
If your pay doesn't match the value of your work, I guess someone logically profits from it?
”U.S. CEOs earn from 400 to 500 times the median salary for workers. For CEOs in the U.K., the ratio is 22; in France, it's 15; and in Germany it's 12.”
People care about a fair society, and rewarding poor performance (or over-rewarding mediocre performance) is obviously not fair.
Note also that many of these CEOs will fire subordinates for failure while they themselves are rewarded for it with golden parachutes.
1. Complexity - a change in exchange rates can hurt Netflix's / Google's / Apple's profit, even if all underlying numbers are correct. Guessing exchange rates is a terrifyingly difficult task, and it is just one of many complications 2019 CEOs have over 1969, let alone 1919.
2. Globalisation - rather ironically, if a company employs an extra 10% of people - no one loses their job they just add an extra 10% - the ratio likely gets larger. How is that a BAD thing that more people are employed? Mattel is the most telling in this context ($6,271 average worker salary). IMHO it's a GOOD thing that Mattel directly employs workers, rather than using a, say, Foxconn. But it makes the ratio a lot worse. Obfuscating real worker wages is bad for workers, but good for avoiding ending up on these sorts of reports.
3. Market size - a follow on from 2, if Google makes 50% of it's revenue outside of the USA, what should the ratio relate to? US workers to CEO? Or South African? A lot of these CEOs are multi-country CEOs, and that is a level of difficulty beyond what existed a quarter century ago.
4. Market forces - a law to make CEO pay public means it is signaling something negative when a CEO makes a low ratio, which drives it up. Having public records of salary makes negotiating easier for workers, and CEOs are no different, so it has had a double upwards pressure.
Just some things that have made it grow over time.
>Yet overall CEO pay continues to increase. According to Institutional Shareholder Services (ISS) the average pay for a CEO in the S&P 500 grew from $11.5 million in 2013 to $13.6 million in 2017.
Notice how it says "overall CEO pay" but then goes on to cite statistics for the average CEO of an S&P 500 company? It's a very common tactic whenever CEO compensation is discussed.
CEO pay is increasing for these companies though and one reason for it is that these companies are becoming bigger and bigger. This means that a CEO is responsible for more people and companies want more qualified candidates for that. Meanwhile the median employee usually doesn't have additional responsibility compared to the past.
Let's look at Walmart and a corner store. The clerk working at Walmart and the clerk working at a corner store roughly have the same responsibilities. On the other hand, the CEO of the corner store is responsible for 5 employees, but the CEO of Walmart is responsible for 2 million employees and this responsibility is growing.
Edit: I'm not saying that this explains the entire difference, but it's definitely one part of it.
So in your example no, more taxes actually.
I think the article is interesting enough to have it's own discussion.
But it doesn't make sense to have two threads about this on the front page, so we'll merge them. I guess I'll merge the comments from that one into this one as a crude form of karma sharing.
It’s easy to sit on the sidelines and complain other people are making too much money. Remember that CEOs making less wont result in employees making more.
Maybe it’s just me, but HN lately seems dominated by whiny/complaining articles that don’t really contribute any knowledge or enhance our lives.
Wouldn’t it be better to focus on how one could become a CEO rather than knee jerk reactions to people making lots of money?
It's not a knee jerk reaction to people making a lot of money. It's an honest reaction to watching the people at the top continue to grow and grow and grow over the last 40 years while the rest are basically paid the same (adjusted for inflation) as they were making 20 years ago.
It's not me you need to convince. It's the tens of millions of people who are barely making it, watching others get tax breaks while they truly struggle with the basics of life. We're not at a reasonable balance any longer, and haven't been. We can continue the status quo, and change will eventually be forced. Something reasonable needs to give here, and the answer isn't everybody becoming a CEO.
It's worth mentioning that the 20:1 from the 70s only covers cash compensation. In the "good old days", execs would also get non-cash compensation: Expense accounts, company cars, executive apartments, country club memberships, etc.
Tax law changes disadvantaged those forms of compensation and are partially responsible for some of that difference.
She got elected because of the primary. She isn't exactly a vote magnet.
>That's probably not what most want, myself included, but here we are going from 20:1 in the 70's to 300:1.
You are fed a narrative. There are people actively working against capitalism that will try to craft a narrative at every turn. Think critically about what you just said:
CEO-to-worker pay ratio has gone from 20:1 to 300:1 in top firms in the US. That last part is very important. The evaluation of those companies has increased as has the average number of employees. The CEO of Walmart needs much better skills compared to the CEO of a corner store. Walmart has over 2 million employees nowadays and they have a revenue of $500 billion. On the other hand, the skills and responsibility required from a clerk at Walmart are similar to the responsibilities and skills of a clerk at the corner store.
>Something reasonable needs to give here,
People need to stop buying into a narrative.
>and the answer isn't everybody becoming a CEO.
The reason he brought up everybody becoming a CEO is because the job of a CEO of these top companies is very difficult. You need very skilled people that are also very positive towards the company, because even the smallest mistakes by them can make the company suffer a lot of losses.
As long as employees making less (and being made to mean less) mean CEOs making more, you are right. But it doesn't have to be that way. It really doesn't, but it requires realigning incentives among many other things.
this is such a thoroughly trivial and simplistic observation, that it contains basically zero useful information.
