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Comment by jordanpg | Hacker News Reader

I would love it if someone could explain to me like I'm 5, why it is exactly, that CEOs are so highly paid.

I get that it's hard. I get that there are long hours. I get that it requires long-term strategic thinking. None of that helps me understand O(100M) "compensation."

I'm pretty sure that executives get paid so much because of (a) their rolodex (ie. their ability to get certain people on the phone) and (b) because the world has -- not accidentally -- become convinced that it must be so and now it is that way. And everyone believes that were it not for O(100M) CEOs companies would fail.

Lots of jobs are hard and require extremely smart, gifted people. And yet somehow only executives get huge "compensation." Someone please break it down for me Barney-style because it seems like bullshit to me.

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Read this book (or its more academic cousin if you want a quantitative treatment): https://en.wikipedia.org/wiki/The_Dictator%27s_Handbook

CEOs are basically dictators with mercenary/conscript armies (depending on market and market conditions) which engage in economic rather than military competition. There are two parts to the job: expanding the size of the profit pie, and slicing it up in such a way as to keep stakeholders happy.

founder-CEOs are in a special position, eg Mark Zuckerberg structured FB so that a large chunk of the stock has no voting rights; if shareholders want to remove him they have to resort to the courts (obviously, the reality is more complex than this thumbnail sketch).

> Lots of jobs are hard and require extremely smart, gifted people. And yet somehow only executives get huge "compensation." Someone please break it down for me Barney-style because it seems like bullshit to me.

The higher your position in leadership, the higher responsibility of your decisions. Higher responsibilities are associated with higher financial risk. Higher financial risk yields higher financial returns.

It's the same reason consultants get paid so much for delivering mediocre projects. They are paid well not because they're great, but because they de-risk whoever is above.

A board of directors want a CEO that de-risk their fiduciary obligations and they will pay for it in excess.

I know a few companies that are not paying CEOs that much, because they're stable businesses. Little risk, less need for top-notch smooth-talking and cold blooded decisions.

Most big companies are facing more risk than you imagine, though, because those risks are measured possibly in decades of strategic decisions and impact in future shareholder value.

Thank you for positing something other than the brilliance and talent of executives! :)

However, while I understand the idea of de-risking to minimize financial and legal risk by hiring certain executives and consultants, it still doesn't help me understand why that translates to paying certain individuals so much money.

No matter how this is presented, it seems to always boil down to 2 possibilities. One, these people are really so talented (in the sense of rare athletes) that they are worth O(100M). I think this theory is patent nonsense, because I simply don't agree that what they do is difficult in the same way that, say, theoretical particle physics is hard.

Or two, various synthetic legal and historical forces have gradually driven the compensations of these people astronomically high in such a way that the economy depends on it, and people believe that it makes sense, like some kind of religion. This is hand-waving and conspiracy-sounding, I know. But it is the only way I can make sense of it.

Well, to us, it obviously looks like too much money. But do you agree that CEO's decision making could take a company stock to anywhere between -5% and +5% its current value in the next year? That's a lot of value at risk. It's orders of magnitude higher compared to the risk related to decision making of regular top management (who already earns in excess of millions).

I agree about the magnitude of the risk, but it is not obvious to me that risk magnitude is proportional to compensation. Clearly there is some relationship between the two, but I don't see why it would be directly proportional.

If we think of executives as machines or devices, then it makes some kind of sense, from the standpoint of a balance sheet. If there's a $5M risk, you might buy a $3M device to mitigate it and still clear $2M.

To this I would observe that executives are unlike machines in several important ways. There is no guarantee that they will perform the way they are advertised, or as well. They are generally guaranteed to be lavishly paid, whether they succeed or not.

Most importantly, if, as I believe, the compensations are synthetically high and there is no genuine supply and demand basis for these compensations, then there is no economic need to pay them so much. Those same jobs could be done by those same people for less. There is nothing particularly special about these people other than their ability to be identified as a magic, oh-so-wise business executive.

My central premise (that I assert without evidence) is that the astronomically high compensations of these people is a social construct. It is shored up by years of legal and corporate machinations that have worked a bit too well. Not any sort of basic economic force. And now it is fait accompli.

Most responses are trying to tell you why they ‘deserve’ their pay. True or not, this is irrelevant. CEO pay is set by the board in the same vote that sets their own compensation. ‘The company’ is not a sentient being. Nobody is looking out for its best interests.

5-year-olds from most cultures would have a hard time understanding this because it breaks their understanding from adult-child stewardship.

It reminds me of the immortal line from The Usual Suspects: "The greatest trick the devil ever pulled was convincing the world he didn't exist."

We shouldn’t moralize this. The point is that CEOs and board members are going to act exactly like anybody else in their position. Find a different structure if you want a different behavior.

Kyle's dad is the coach of your soccer team, right? Kyle's dad gets really really excited when you do well. He makes it fun, and you love going to practice! And you guys seem to win a lot!

Do you remember last year, when Mike's dad was the coach? He yelled a lot, you hated going to practice, he made you cry? And you never seemed to win?

Because Kyle's dad is a better coach, you win more. He's worth more to the team. Even though Kyle's dad isn't actually playing on the field, he makes you guys win. That's what a CEO does -- he makes a team win.

Right, lots of wins are good, but why does the coach need to get paid $100M? Why is $1M not good enough?

Let me guess: because being a coach is so hard, and requires so incredibly much smarts and talent that only a precious few people have?

If this is true, why don't companies just higher people who are willing to be CEO for less money?

Why don’t companies hire software engineers who are willing to write code for less money?

People tend to want to be paid market value

Many people with the skills to be CEOs of important companies would consider $1M a rounding error. It makes no difference to their economic outlook.

Also, there are many ways to make $1M without the risk and responsibility of being a CEO (among other things, just making low-risk investments with a $20M portfolio).

So between the comparative ease of making $1M elsewhere, and the low impact of $1M (to someone with tens of millions in the bank), it's not surprising why such people cannot be had for that price.

Are you saying that, as a result of being so incredibly talented, by definition, executives are already rich and therefore have to be paid more to keep them around for their valuable services and wisdom?

I take no position on talent or wisdom, but yes the kinds of people capable of being F500 CEOs are mostly already in this category of richness.

Amazing ELI5 on the value CEOs bring to the company.

Only difference: instead of coach Kyle making just _you_ feel great, he's actually running the US Olympic Junior Team and has to hire five or more coaches under him that make _you and your teammates_ feel great and perform well.

That's why CEOs get paid well: their impact has a much wider scope.

I’m not sure I could adequately explain this to a 5 year old, but it really just comes down to the perception of supply and actual demand.

I say perception because even though a “random person off the street” might be able to successfully run a Fortune 500 company, most of them wouldn’t and the boards/shareholders won’t tolerate the risk of allowing untested leaders to run massive companies. On the flip side, just because someone has experience and a good track record of results doesn’t mean they will succeed in future endeavors—a good example of this is that Pepsi guy (John Sculley) who took the helm at Apple and drove its business to the brink of death, this despite being paid in 1987 the highest salary of any company in the valley.

That is simple: because CEO's need to be the best of the best.

Most professions require an average performer. Building my house didn't require the best of the best. Programming software doesn't require the best of the best.

But there are other professions where you need (to be) the best of the best: athletes, musicians, authors, ... . Coincidentally also the professions where the top performers make a crazy amount of money, and the average ones starve.

If you invest your money into a company, and hire an average CEO, you company will be crushed by a competitor that hired the top of the top CEO.

That is why shareholders are willing to pay so much money, because they are fishing in the same pond as their competitors, and will be crushed when picking the average performer.

I don't agree that they are the "best of the best." Or at least it's not obvious to me that they are, in the same way a talented musician or athlete is.

The supply/demand theory only explains the high cost of CEOs if there is an extremely limited pool of them. Because I reject the premise that they are just so incredibly talented, there shouldn't be a limited pool of them.

I suspect the pool is limited, but not because CEOs are just so incredibly talented. I don't know exactly why, but I doubt it's raw talent. I suspect it has more to do with access, background, friends, networks, gumption, dedication, and luck.

Anyway, my objection is to the grotesque size of their compensation. Since I don't believe the "talent pool" theory, no matter how talented they may be, it cannot possibly be worth that much. Thus, the numbers are so high for some other reason, and now everyone is post-hoc convincing themselves that it makes sense. It does not. It makes no sense at all. The emperor has no clothes on. It is self-evidently absurd to imagine that this limited pool of executives has so much talent and is so small that they deserve to be paid 1000s of times more than the best physicists, physicians, artists, etc. the world has. It's bullshit. /rant

Let's say you invest $10M in your company, and I also have a competing $10M company.

I go the traditional route and hire a top CEO with a big chunk of money. The rest of the workforce gets what they get elsewhere.

You hire a CEO that is "fairly" compensated. You will basically need to make a bet on someone non-established, and hope they can perform. With the extra money, you can either hire better talent or hire more people.

The success of a company is so reliant on where the leader takes it, that 9 times out of 10 you will lose.

And that is why my company will survive and have a CEO that is grotesquely compensated.

Funny part is that when you win, either your CEO will be snatched away for a grotesque amount of money, or you will have to pay that amount to keep them.

You're just reiterating the premise that higher-paid CEOs are more talented.

I'm saying I doubt that that's actually true. I think higher-paid CEOs bring something to the table, but it isn't talent. It's something more connected to an entrenched, corrupt system that has--incredibly--achieved buy-in from global capital markets. I suspect it has more to do with access, background, friends, networks, gumption, dedication, and luck. But not talent.

My point is that anyone could have those things. To the extent there is a true supply and demand aspect to this, it is mostly just simple luck.

I agree that they also need to bring those things to the table. But "talent" is a personal trait right, so I guess that includes dedication and gumption.

Plus, being able to perform under high stress, being a great communicator, organiser, putting processes into place, dealing with all kinds of personalities, convincing customers, providing certainty in an uncertain environmemt to customers, employees and investors, etc.

Your claim that anyone can do that is simply not true.

> That is simple: because CEO's need to be the best of the best.

I don't think this is the case at all. The prime criteria are: 1) Have you been a CEO before of at least a medium sized-company? If so you'll probably be able to handle lots of CEO-type situations. 2) (Not crucial.) Have you done it in this sector already? If so we can talk to others in the sector and figure out a bit about you and your relationships.

Supply and Demand.

The supply of great CEOs is very limited, but the demand is very high.

Therefore the price of CEOs are very high.

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