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Comment by Traster | Hacker News Reader

I feel like CEO pay is one of these emergent problems with our current system. We have this group of people whose salaries are just astronomical compared to the average person in the company, and whilst it's true their job could technically make more of a difference these payouts are totally asymmetrical and completely independent of how effective a CEO is.

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It is highly suggestive that CEOs are the ones who determine the pay of CEOs, in practice. If the shareholders actually had to negotiate the remuneration packages I bet the CEOs wouldn't be able to command the salaries that they do. There isn't enough evidence that paying more for a CEO increases profits.

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.

Isn't CEO compensation generally determined by the compensation committee of the board?

at a large enough company with an independent enough board, sure. but these committees are largely driven by ceremony and politics under the guise of having to do with objectivity.

I wonder if it really is asymmetrical to value they bring.

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.

A good CEO can create massive value, but the present value of any particular choice of CEO -- which should be an upper bound to the performance-independent pay they are able to negotiate -- needs to be diminished according to the uncertainty in the evaluation. That's where the leverage excuse falls apart: uncertainty is through the roof. Everybody's throwing darts at a dart board and everybody knows it, so if the story about rational value estimation and leverage were the whole truth we would not expect to see CEOs reliably paid stratospheric salaries for mediocre or failing performance, yet that's exactly what we see. We should therefore consider alternative explanations.

I’ve always wondered: if CEO pay was truly tied to their “creating value” then shouldn’t they lose money if they destroy value? If the answer is yes, then why aren’t bad CEOs losing money? If the answer is no, then why do we pretend they are paid in proportion to the value they create?

I’ve always wondered: if CEO pay was truly tied to their “creating value” then shouldn’t they lose money if they destroy value?

Not necessarily. They'd be plain-old investors then. CEOs are like options traders who pay for their call options by working 60 hour weeks.

In many cases, the lion's share of C-level pay is not straight up cash, but equity. They might still make money if they destroy value, but the better they do for the company, the better they do for themselves. That's what you're looking for, right?

Better still, that stock compensation isn't really paid for by the company. The costs of paying with equity accrue to shareholders in the form of dilution.

That's why I was careful to scope my complaint to performance-independent pay.

The CEO is the only person in the company who can really negotiate for what they're worth (instead of the commodity price for their labor) because business people don't usually have specialized irreplaceable positions and technical people are not usually negotiation experts.

CEO pay is often set by compensation subcommittees of the board. On the board are typically people who have familiarity with high-level management, often, suprise!, CEOs of other companies. By bias or intent this leads to excessive CEO pay.

And when their pay is tied to some degree to "effectiveness," it's tied to performance of the stock price, instead of the actual performance of the company. It's much more difficult to quantify the latter, but short term increases of company stock can be brought about by sacrificing the long term outcomes of the company as a whole.

Agreed. The fact that pay is often still astronomical in the case of the worst possible outcomes strongly suggests that leverage is just an excuse. I'm pretty sure that the real answer is that CEO pay is just the Rules for Rulers [1], capitalism style.

[1] Rules for Rulers: https://www.youtube.com/watch?v=rStL7niR7gs

Apparently the CEO of Renault Nissan while compensated fairly compared to Hapanese counterparts, was unhappy that compared to NA and EU auto companies he wasn’t so set out to set up another unofficial compensation mechanism to bring him closer to the global pay scale.

poor Carlos, his friends were probably giving him shit about the size of his yacht.

But pay is part of politics, and corporate government is less stingy than public government. Pay hikes are part of the game of alliance building that is played whenever the board elects a new CEO. Corporate government is plutocracy in practice.

> emergent problem

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.

CEO pay comes out of stockholders' pockets. If you believe corporate money is wasted on them, don't buy their stock.

> completely independent of how effective a CEO is.

It's not for you to judge that, it's for the shareholders to.

Salaries are determined by market forces. Board pays CEO as much as they value her or him. "Pay gap" between CEOs and proletariat is a meme and as such should not be considered seriously.

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