CEO pay in perspective how big is that rip-off anyway?

…the B-ratio I proposed here, measured as the CEO pay over the total payroll of the firm, relates CEO pay to the salary of each employee and may be the most relevant and informative figure on CEO pay as perceived by the firm’s employees themselves. How much a typical employee of the S&P500 firms implicitly “contributes” to the salary of his/her CEO? An amount of $273 on average or 0.5% of one’s salary, that is, one half of one percent on an individual salary basis.

That is from Marcel Boyer, via Alex T. and the mysterious v and Vincent Geloso.

Comments

He says "*may* be the most relevant and informative figure" because his only evidence for the assertion is a thought experiment.

It doesn't bother me what CEOs are paid as long as 1. They set a company up for long term success and 2. Employees share in the spoils.

Absent 1. and we basically have the Wall Street bailouts. Absent 2. and we have the ails of current day corporate America.

The only criterion you should have is whether you are Ibeing paid a fair wage for your labor. It does not matter if the CEO is working for free or making a billion dollars. It should be totally irrelevant to you. As a worker, you could be treated well and fairly by a company whose CEO makes a bundle, and treated like crap in a company whose CEO works for free.

Why should you possibly care how much money some person you've never met makes?

You have all the information you need to determine if you are being paid fairly or not, even if you have no idea who your CEO is or how much she makes.

Yes, it’s very impressive the way a single CEO can manage the operations of an entire massive firm without using any other managers. Oh, what’s that? There are dozens of layers of middle managers under the CEO, whose salaries should also be accounted for as a fraction of total payroll? Huh, it almost starts to look like CEOs of large firms are sucking out a hefty portion of payroll ON TOP of the massive portion already consumed by the hundreds of middle managers who do all the, you know, managing.

Bingo. Looking at just the CEO is silly. At least unclude the top 5 names execs in the 10k.

I noticed the twitter exchange between Alex and Krugman.

Krugman is a Nobel prize. Why does he not go to some private equity fund, shows his data on the most egregious examples, and they organize a hostile take-over, fire the CEO, and everybody is happy? Walk the talk, Mister Krugman.

That's a fair point. The market for CEOs looks like a classic market for lemons. A bad CEO can really screw up a company and the number of people who can demonstrate -- through years of experience in a CEO or comparable senior management position with verifiable accomplishments -- that they won't screw up is very small.

So, once Krugman and his private equity team fire a useless CEO, they have to replace that person with someone useful. How do they find such a person and how do they negotiate compensation?

Tech firms (and other firms with so-called knowledge workers) have relatively few employees, mostly high paid employees, so this approach produces a reasonable result for such firms but not for industrial firms, with large numbers of employees, many low paid. The problem, of course, is that not everyone is a knowledge worker who can work for a knowledge firm. [An aside, I'm not opposed to income inequality, although it is what eventually produces wealth inequality, the more problematic form of inequality. The problem is that everyone suffers from wealth inequality, those on the low end the most.]

Wealth inequality does not rely on income inequality.

Outside of the extremes it’s mostly a function of savings rates.

Wealth inequality has to start somewhere, the somewhere being income inequality. Then wealth inequality produces more inequality (of both kinds), in particular when rising asset prices are considered the path to prosperity. Sure, the savings rate: the higher the income, the higher the savings rate. Again, income inequality is a good thing in my view, but when it produces a high level of wealth inequality, everyone suffers, especially those at the low end (because they have so little).

I grew up in a poor neighborhood, and started with nothing. A friend of mine from the same neighborhood has consistently made more money annually than I have throughout our lives. He is poor, and I am not. How come? Poor choices. Not saving money. Choosing to rent instead of buying a home, and spending the excess. Always driving a newer car while I drove 10-15 year old cars. Marrying the wrong woman, and getting divorced. No impulse control, always choosing immediate gratification over long-term gain. Always getting himself deep in debt for new cars, vacations, new stuff for the home.

I wouldn't say a minimum wage worker can get ahead like this, but there is no excuse for a median-wage person to be chronically poor unless there are extreme life circumstances.

Wealth inequality is only interesting because of the extremes. Meaning that perhaps the CEO should be compared to the disabled ex-miner in West Virginia, rather than his median employee.

(Note that when you do *that* comparison you are led more to tax and transfer, rather than any kind of cap on employee/CEO pay.)

Oh, you'd be wrong about that.

Yeah but the extremes are what matters. The difference between top 60% and top 51% is a lot less meaningful to people than the difference between top 10% and top 1%. Top 1% for wealth in America is over $10 million. Even someone who saves $100,000 a year (which would require making $300,000 a year and saving 60% of after-tax income) is not going to get to $10 million unless they have very lucky investment returns, particularly considering that the 1% threshold is going to rise as their savings are accumulating. People don’t save their way to the top 1%; people get that way either through multigenerational accumulation, very lucky investments, or seven-figure incomes.

Excessive wealth inequality is self-correcting, that's the view of Cowen's Austrian friends; self-correcting provided markets are allowed to be markets. What's your view of markets?

If zeroing out a CEO's pay is this impactful to the incomes of a company's employees, you can imagine how many social programs we could pay for if we taxed the millionaires.

The CEO with the highest "pay package" earns $50k or so, which is so trivial to his living expenses he hasn't cashed a single check, which is much smaller after taxes, etc. This pay is mandated by law based on his being classed as an hourly worker (exempt) with many hours on the clock.

He lives on debt backed by his assets with occasional asset sales to service his debt.

However, in 20 years his compensation will be options and stock grants totalling hundreds of billions, and potentially approaching a trillion.

It all depends on shares of Tesla stock going from a few dollars a share when purchased by him to thousands of dollars per share.

This is all fiction made reality by Friedman selling the economists on price defining value, not labor cost.

And this so dominates economics that paying workers to build an asset has no relationship to its "value", thus, the infrastructure to your house or to your new dream house has no value because the price of the infrastructure is effectively zero because without being sold it has no price, so its price is zero, thus its value is zero.

The miles of road you drive each day have less value than a single share of Tesla stock.

And building a new road is a total waste because the labor costs are far in excess of its value, which is zero in post Keynes Friedman economics.

"because without being sold it has no price, so its price is zero, thus its value is zero"

That seems to be false, I just run this in sql to prove it ;)

# select null is not distinct from 0;
false

It depends how much money you want to raise. Fortunately, the IRS publishes data on the distribution of Adjusted Gross Income, here are some figures from 2017 showing what percentage of total AGI is associated with filers who earn more than what is listed below:

$500,000+ 21% (approximately the "1%" threshold)
$100,000+ 62%
$75,000+ 72%

'CEO pay is not the only source of compensation of CEOs. Other forms of compensation, such as options and bonuses, are incentive-based and related to different measures of the firm’s performance and are therefore risky and uncertain. These are not considered as CEO pay, which relates more to a given and certain payment or salary. Among still other forms of incentives are the value of stock portfolios detained by CEOs. But these are not really different from the stock ownership by people or groups such as unions, whose returns are not considered as salary'

What a joke. Just for fun, after reading Prof Cowen's book, I looked up about 20 papers on CEO pay, the result of which was there was no agreement on what constitutes compensation for the CEO, it being left to lawyers and accountants to concoct an artisanal package for particular CEOs.

The Bureau of Labor Statistics does not include stock options in it data on compensation.

Here's the problem:

Take two people. Person A is given $100. Person B starts with nothing. Person A can choose to give Person B some of the money.
Person B then decides whether they both keep the money, or they both get nothing.

If Person B is HomoEconomicus, he will happily accept $1, or anything greater than $0, because he starts with nothing, and anything is better than nothing. But in practice, when A and B repeat the experiment many times, the result converges to $50. B will insist on some form of fairness or justice, and is prepared to accept nothing until he perceives fairness. Person A learns to be fair. You can do the test with chimpanzees or rats, and get similar results. The sense of fairness is innate.

How does this apply to CEO pay? If the CEO and his superiors (the board, owners) are optimizing economically, he should pay his workers their replacement (market) value, or maybe a little more to reduce the cost of churn, irrespective of the corporation's profit. The employees, in turn, should be happy to be paid what they're worth on the market.

But they won't be, because they're the same people who wanted a 50/50 split in the experiment. If a successful company does not share the wealth in a way that seems fair to the employees, the employees will all feel cheated, and will act in ways that damage the company, even it if hurts them. Similarly, voters in a democratic society that is prosperous enough to create a surplus, when confronted with what they perceive to be unfair distribution of society's wealth, will act to tear down that system, even if it hurts them.

That is why Bernie Sanders could be president a year from now. Bernie-style socialism could be deeply damaging to the economy, because he's proposing 1970s socialism, not 2020 Sweden, but people are really unhappy about inequality, and they're willing to take the chance on damaging the economy to make it more fair.

That is why the only long-term correction to inequality is for the wealthy to decide that inequality, particularly conspicuous inequality, is morally wrong, and participate in a greater sharing of the wealth. They can oppose measures to address inequality by using their wealth to buy a few elections, but eventually there will be a President Sanders, and after him a President Hugo Chavez, and then we'll all be equal amongst the ruins. The good news: I bet Venezuela's greenhouse has emissions are way down, now that the economy is running at 30% of what it once was.

If it comes down to Bernie vs Trump, I'll have to admit that Tyler Cowen was right, and that the polarization could become more symmetrical in time.

(It's odd to mention Bernie without Trump, who made all the same promises. We saw how that worked out. Thiel and Zuckerberg got more of a voice in government by and for billionaires than any random Joe from a Trump rally.)

But we aren't there yet. If it happens, we'll have to choose .. between chaotic altruism and chaotic oligarchy.

(It's odd to mention Bernie without Trump, who made all the same promises. We saw how that worked out. Thiel and Zuckerberg got more of a voice in government by and for billionaires than any random Joe from a Trump rally.)

this appears to be a comment focused on the Obama admin.

In particular I don't think Sanders will even be nominated, but your broad point is a good one. It's basically the justification for the welfare state's inception. Unbridled capitalism had to evolve in a more socialist direction (starting with Bismarck's Germany) or the pitchforks would have ended it.

And this is not only pragmatic, it's morally correct. There has to be a division of the surplus that affords the least of us some basic level of support, that's just a healthy society.

The arguing is all in the details. There will always be one side agitating for more redistribution and one side agitating for less. But when the extremes get too extreme, either we vote to curb the extremes or the market does it for us.

So my reply to Tyler and others who make value-added calculations to justify CEO pay is that the economics are somewhat irrelevant. The relevant tome is more "The Theory of Moral Sentiments" than "The Wealth of Nations". The natural outcome of an un-moderated capitalist system that maximizes wealth is for all of the wealth to be possessed by a very few, but that is unstable in the medium term. Extravagant CEO pay is wrong precisely because it seems wrong to most people; the economics are secondary. The choices are smart redistribution with the consent of the wealthy, or ruinous redistribution amidst chaos. I've worked in companies where, when bad financial results were announce, the employees laughed and headed to the bar early to celebrate the probable defenestration of the CEO, even though layoffs might be coming soon. People are funny like that.

+5 i.p. for both of these posts, Tom.

No one cares about inequality. People care about whether their own lives are getting better or worse. The only reason the left is trying to push inequality as a political issue is because the economy is roaring and the people at the bottom of the income distribution (i.e., the people the left purports to care about) are actually seeing wage growth for the first time in forever. We'll see in 2020 how many of those voters buy into the argument that they're better off returning to the days when they got nothing, as long as the wealthy get torn down in the process. Personally, I'd be embarrassed to make that argument, but again, I guess there's nothing better at hand.

My experience in working with a few Fortune 500 CEOs is that they are vastly overcompensated. And, so are the folks immediately around the, which makes their comp not so bad either.

So, I asked the General Counsel of one of the firms: How did this new CEO get the job, because he was really not that smart (and subsequently proved it). The Answer: He played internal politics very well, and benefited from the former CEO sending his likely rival to a foreign location to get some "foreign" experience; that left a succession gap into which this guy lept when there was a problem with the former CEO.

One point though: CEOs are not in that position forever. And, if they later are replaced, they are humiliated and have fewer choices other than sitting on non-profit boards. It is a matter, though, of climbing the greasy pole and knowing how to use your elbows in the process. Don't assume politics is only in Washington.

It seems to me the work has a couple of basic problems. Not in order of importance, but rather in the order they came to mind:
* CEO's are an employee. Is their compensation included in the median?
* It is not JUST CEO compensation, but the upper levels of compensation. Using the CEO's compensation alone could be misleading.

Power belongs to the people that take it. Nothing to do with their hard work, strong ambitions, or rightful qualifications, no. The actual will to take is often the only thing that’s necessary.

"You might also add to your list of good books: Stanford Economist Matthew O. Jackson's book: The Human Network: How Your Social Position Determines Your Power, Beliefs and Behavior."

Thanks to Bill for recommending this book, which includes essential reading on the 08 Financial Crisis. I'm wondering if anyone knows how CEO pay figures into this network model.

"Roger Sweeny
December 26, 2019 at 7:03 pm
You may well have read it but Ed Yong's I Contain Multitudes: The Microbes Within Us and a Grander View of Life was one of 2018's very good biology books."

Thanks to Roger. It's an excellent book about emerging scientific knowledge.

"peri
December 26, 2019 at 10:55 am

Then you owe it to yourself to check out "Who We Are and How We Got Here." Very much in the popular science vein. Reich occupies an unenviable position, as both the human biodiversity deniers and proponents find him "problematic."

Thanks to Peri, another excellent book about emerging science. I could be wrong, but it sure seems there's a lot of important scientific work being done now. Don't hesitate to recommend books, as this blog's network is very well read.

Had some mean,mode, and median in that mix.

Sorting it out I call the organization and eight bit hologram. Invet a half point get 200. The half point is error on the hologram, so it is about an eight bit organization. It can make decisions to 1/200 of an error, under the assumption that it is a minimal, binary spanning tree with no loops.

So, if true then I expect to measure their decision errors as volatility in the denominator on PE.

How did I get to the math?

I treated the org chart as a message decoder that emits the complete sequence of commands to tak the company through one complete inventory cycle.

I said that is a uniform, fixed sized set of messages were passed through the org chart, under what conditions would it jam up, messages get congested at a node. Solving that problem is the same as =optimally encoding messages via Shannon theorem, we know that one.

We know more. Ifthe messages are not congested, and the org char is balanced then we have removed 'moments' in the message distribution by encoding, a kind of entrop compression.

We know what that decoding tree looks like, it has rank, eight. I assumed that because the number half point, I inverted it and approximated the messages as uniform eight bit quantities, and hand waved the mean,mode, median self confusion.

This is abstract tree folks, the CEO is the root, and the messages distribute out, then cause employees to follow an hologram around the factory, we fool them into actually doing stuff.

Would someone mind helping me follow the math? He starts with the averages, which are 281:1 and $1961 per employee. Then he whittles that down by citing the medians, which are 170:1 and $564 per employee. That’s still too high for the point he wants to make, so step 3 is a weighted average that bumps the ratio up to 185:1 while reducing the pay per employee to $273. I don’t understand step 3.

Life imitates art? Post-Columbian art in South America is certainly subject to scrutiny due to the historical dialectic that preceded its time. Any mass movement and hysteria repeats itself in iterations. Art occurs even in the most oppressive circumstances, perhaps optimally in this way. Was Riefenstahl stuff considered art during her contemporary or only posthumously? In retrospect, the posters is Soviet propaganda were the most beautiful and powerful I’ve ever scene. It’s a mixed bag.

I just wanted to remind everyone that it is Jan 17, 2020 -- and Donald Trump is your President.

And also that I, along with many millions of other people, find your pain to be absolutely hilarious.

What pain? I find our president immensely hilarious, and he has provided more entertainment than any other politician in my lifetime.

I want to propose a new economic experiment.

Ask each employee of a large firm if they would voluntarily allocate 5% of their salary to pay their CEO's salary.

The results should be interesting and in line with George Masons
economic teachings. Right?

Couldn't you apply a similar logic to every employee? The guy who unlocks the car park every morning is pretty important right? Surely it is worth 1% of the CEO and everyone else in the building's pay to be able to get into work every morning?

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