Two new articles on CEO pay

[Darth Wong]

http://www.theglobeandmail.com/report-o ... le1335827/

Bonuses don't mean better performance

Of the most lucrative pay packages ever handed out in Major League Baseball, the top two spots are held by one man: Alex Rodriguez. The $252-million (U.S.) contract he signed with the Texas Rangers in 2000 was topped only by the $275-million deal he inked with the Yankees in 2007. And that’s not counting the seldom-disclosed payouts he will receive for reaching certain milestones—playing in the All-Star game, for instance, or making the playoffs. But in baseball, as in business, paying top dollar is no guarantee that talent will come through in the clutch. A-Rod (or A-Fraud, a sobriquet his teammates once bestowed upon him) has a dismal playoff record. The Yankees haven’t won a pennant since he joined the team in 2004. And since 2005, he’s batted 7-44 in the post-season (a .159 average). It appears the richest player in the game—a three-time MVP—chokes at the prospect of winning it all.*

We’re all chokers, in a way. While few of us will ever face a shareholder audience as diehard as Yankee fans, most of us can relate to the stress of making year-end numbers. Bonus season is our post-season, but research suggests that our reward-based culture is undermining our ability to excel at our professions. Bonuses don’t work.

In 2008, Dan Ariely, a professor of behavioural economics at Duke University and the author of Predictably Irrational, led a series of experiments to determine exactly how people respond to financial incentives. Participants in the study were asked to play memory games, put together puzzles and perform physical tasks, such as throwing a ball at a target. When they performed very well, they earned a payout. Some subjects were promised a small bonus, about the equivalent of a day’s pay, while others were shooting for a much bigger reward.

Here’s what happened: For tasks that required no cognitive skill, such as repeatedly pressing the same key on a keyboard, performance improved when researchers upped the bonuses. But for tasks that demanded any intelligence at all (some participants played an electronic game of Simon Says), the incentives didn’t work. In fact, the bigger the bonus, the worse the performance.

Nina Mazar, one of the co-authors of the study, is an assistant professor at University of Toronto’s Rotman School of Management. She warns that individuals should be aware of the added pressure they take on when a large portion of their compensation is contingent on performance. “It could wind up reducing their performance, thereby hurting their pay or their prospects,” she says.

Of course, many in the C-Suite already know that bonuses are bunk. In 2003, Harvard professors Michael Beer and Nancy Katz anonymously surveyed over 200 senior executives in more than 30 countries about their bonus plans. The overwhelming consensus was that bonuses had little or no effect on how their companies or employees performed. Many execs even admitted to low-balling expectations, to ensure everyone was eligible for a bonus.

And there’s the rub: You don’t hope for a bonus; you expect one. The first company to voluntarily scrap its bonus pool will undoubtedly watch as talent flocks across the street (right into the arms of Goldman Sachs, whose current $12-billion U.S. compensation kitty is the biggest it’s ever had). One might have thought a long and painful recession would have compelled companies to reconsider their most basic practices, but, this year, many will carry on as usual. Welcome to the new economy—same as the old economy.

http://www.cbc.ca/consumer/story/2009/1 ... o-pay.html

CEOs vastly overpaid, study suggests
U.S. researcher used chemical engineering equations for calculations
Last Updated: Wednesday, November 4, 2009 | 4:05 PM ET

Chief executives in 35 of the top Fortune 500 companies were overpaid by about 129 times their "ideal salaries" in 2008, according to an analysis by a Purdue University researcher.

Venkat Venkatasubramanian, a chemical engineer, said he's devised a new way to calculate the true worth of top CEOs based on equations found in chemical engineering.

His paper — What is Fair Pay for Executives? An Information Theoretic Analysis of Wage Distributions — was published Tuesday in the online open-access journal Entropy.

Fair pay for an average S&P 500 CEO should ideally be in the range of 8 to 16 times the lowest employee salary, according to Venkatasubramanian's calculations.

By contrast, average CEO pay ratios were about 11-to-1 in Japan, 15-to-1 in France, 20-to-1 in Canada and 22-to-1 in Britain in 2006.

Since the 1970s in the United States, the ratio of CEO pay to the lowest employee's salary has gone up to as high as 344-to-1 from about 40-to-1

Last month, the U.S. Federal Reserve announced a plan to eliminate excessive pay packages that might encourage bankers to take reckless risks, and the newly appointed U.S. pay czar, Kenneth Feinberg, has announced plans to reduce executive pay at companies that received the most federal bailout money.

Venkatasubramanian said it was not so unusual for a chemical engineer to dabble in economics. He basically took the same rules to govern statistical thermodynamics and applied them to economy.

So, to recap: large incentive bonuses do not seem to improve performance in any area requiring cognitive abilities as opposed to sheer manual labour, and US CEOs are enormously overpaid relative to CEOs in other countries, yet I doubt anyone would suggest that US executives are ten times better than, say, Japanese executives. Why does the idea that "we need to offer huge pay and bonuses to attract top talent" have so much traction in American politics?

[Serafina]

Why does the idea that "we need to offer huge pay and bonuses to attract top talent" have so much traction in American politics?

It appeals to most "common people". After all - if your boss would offer you a big bonus (say, 50% of your income), wouldn't you work harder?

Of course, this does not translate to managment very well:
-It's easy to double your physical effort - just work twice as long. You can not do the same with thinking processes.
-There is no direct, simple link like "we will pay you 500.000 for every 5% increase in profit" between boni and performance.

[phongn]

Warren Buffett, an immensely successful CEO by any measure, had total compensation of US$175000 last year and has generally kept a relatively modest paycheck throughout his career. (I do realize he's incredibly wealthy from his stock value)

As for huge pay and bonuses? It's probably slowly evolved that way and now is firmly embedded in American corporate culture. Plus, the boards are probably loathe to cut the pay of their own and the shareholders aren't exactly complaining a lot. A lot of US executives probably expect such huge pay now as well - entrenchment means that he (or she) could find another job somewhere else for high pay. Earlier articles posted here indicated that top executives would do it for much less pay - but why would they do so if another firm will pay a lot? Short of major regulation in pay or widespread shareholder rebellion, I'm not sure what could be done.

[Darth Wong]

Major regulation in pay is not a preposterous idea. Why not cap CEO pay at a limit of 25 times the pay of the lowest-paid employee in the company?

I realize that this would be viewed as "communism" by rabid foaming-at-the-mouth American right-wingers, but it's not unreasonable. 25 times is still a huge multiplier. It is hardly equivalent to forcing everyone onto the same level.

[Slacker]

Without disagreeing with the article, I have to say the baseball analogy is horribly flawed and completely misses the boat. Also, given the Yankees won the world series last night, somewhat dated already. If one wants to make comparisons to individual achievement, A-Rod's won several AL MVP awards, which could be the only real way to quantify individual achievement in a team sport. I mean, I don't like the guy, but he's not a good way to show that bonuses don't work.

[Darth Wong]

That's why the article cited an actual study done on the subject, instead of using A-Rod as its sole justification. Did you not bother reading past the first two paragraphs? A-Rod was used as an example, not a justification.

[Mr Bean]

That's why the article cited an actual study done on the subject, instead of using A-Rod as its sole justification. Did you not bother reading past the first two paragraphs? A-Rod was used as an example, not a justification.

Or better to say they only had to fork over a quarter of a billion dollars to ONE player in exchange for one world series. Which is a shitty rate of return. Heck we are less than two decades (80's) when the top gross players made 1/200 of what A-Rod is making and yet they somehow managed just fine on w/inflation adjustment just under half a million a year.

[D.Turtle]

And just to make the point that it is possible to cap the pay of executives:

BMW to link managers' compensation to factory-worker wages

Responding to increased criticism of executive compensation rates, German automaker BMW plans to tie managers' salaries to those of assembly-line workers.

BMW plans to develop a new pay structure that links the salaries of its top executives to the wages of regular workers, the Frankfurter Allgemeine Sonntagszeitung newspaper reported on Sunday. It would be the first German manufacturer to do so.

Currently, the average salary of a worker on BMW's assembly line is around 40,000 euros a year ($60,100) while an executive board member's salary is around one million euros. In a proposal being developed by BMW, this ratio, approximately 25 to one, will remain at that level.

BMW's human resources director, Harald Krueger, speaking to the newspaper, said that one of the reasons for keeping that ratio is to prevent the salary gap from getting any wider. Thus, if profits drop for the carmaker, it will be the executives who will suffer higher pay losses rather than the workers.

Motivating employees

Krueger was critical of the business culture of paying large bonuses. He said that using bonuses as motivation created a harmful environment in the company. He said that BMW employees were by nature self-motivated and didn't need to have a carrot dangled in front of their nose to get them to work.

BMW said that it is also working with the unions to negotiate the basic details of how maintaining the ratio will work.

Hopefully this will lead to a few companies following suit.

[Aasharu]

I just can't understand this kind of thing. With a million dollars a year, you can live a very comfortable upper class lifestyle, go on several vacations a year, and still have money left over to invest. Who on earth needs more then that? What do these people do with all this extra cash? Buy a score of cars they'll never drive? Buy a half-dozen houses that they may stay in one or two days a year? I see shows like Lifestyle of the Rich and Famous, with people like this buying custom made pleasure yachts, and I think to myself, "Who needs all this crap?" And then I hear people talk about how much they wish they could have all that stuff, and it just blows my mind.

But of course it will never change, because the board of directors would never approve pay cuts, since then they might get their pay cut as well. And, as was mentioned, even if the shareholders of one company forced change through, the CEO would just move to another company.

[General Zod]

I just can't understand this kind of thing. With a million dollars a year, you can live a very comfortable upper class lifestyle, go on several vacations a year, and still have money left over to invest. Who on earth needs more then that? What do these people do with all this extra cash? Buy a score of cars they'll never drive? Buy a half-dozen houses that they may stay in one or two days a year? I see shows like Lifestyle of the Rich and Famous, with people like this buying custom made pleasure yachts, and I think to myself, "Who needs all this crap?" And then I hear people talk about how much they wish they could have all that stuff, and it just blows my mind.

Once you get to a certain level of wealth it's more about glorified dick-waving than any kind of "need".

[That NOS Guy]

Without disagreeing with the article, I have to say the baseball analogy is horribly flawed and completely misses the boat. Also, given the Yankees won the world series last night, somewhat dated already. If one wants to make comparisons to individual achievement, A-Rod's won several AL MVP awards, which could be the only real way to quantify individual achievement in a team sport. I mean, I don't like the guy, but he's not a good way to show that bonuses don't work.

Well, let's put it this way.

Amount Phillies paid for a win (Opening day salary $113 million, 93 wins): 1.21 million
Amount Yankees paid per win (Opening day salary $201 million, 103 wins): 1.95 million

Even though the Yankees won 10 more regular season games than the Phillies, they are grossly more inefficent when it comes to amount of salary per win. Where does this inefficency stem from? Is it overvaluing of players? Of course.

Let's go deeper:, let's look at their respective right-fielders for example:

Jayson Werth: .268/34/99/.879 WAR: 4.7. Total 2009 salary: 2.5 million.
Nick Swisher: .249/29/82/.869 WAR: 3.5. Total 2009 salary: 5.4 million.

If you want to have some fun, A-Roid's 2009 stat line? .286/30/100/.934 WAR: 4.4. Total 2009 salary: 33 million.

Oh, and he's only getting older ad his defense appears to be slowing down which only further drags his value down. If anything he's been consistently overpaid and the Yankees, by virtue of being able to drop 1/2 a billion dollars last year in Free Agency, were able to finally assemble a surronding cast that covered up his mistakes. Looking at the numbers the Yankees are so grossly inefficent it's little wonder that they don't dominate every year in spite of their monster payroll.

[The Kernel]

So, to recap: large incentive bonuses do not seem to improve performance in any area requiring cognitive abilities as opposed to sheer manual labour, and US CEOs are enormously overpaid relative to CEOs in other countries, yet I doubt anyone would suggest that US executives are ten times better than, say, Japanese executives. Why does the idea that "we need to offer huge pay and bonuses to attract top talent" have so much traction in American politics?

You said it yourself, it's not about performance it's about retention and attraction of top talent.

Ultimately I think the CEO pay thing has a number of factors going on in the US:

• 1) Cultural: I think the whole "American Dream" thing means that everyone wants to see people at the top in obscene wealth because everyone thinks they will achieve that level someday.
  
  2) Slippery Slope: CEO pay wasn't always this high, but the free market (combined with reason #3) has led to out of control increases in CEO compensation packages.
  
  3) No Shareholder Control: Contrary to layperson belief, the pay packages of CEOs are not voted on by the shareholders, they are set by the company board of directors. Especially in the US (where business ethics is not a required, or even encouraged course for MBAs) there is a lot of incest where the CEO is personal friends with many of the board members and they use this influence to grant enormous pay packages that have nothing to do with performance.

[The Kernel]

Major regulation in pay is not a preposterous idea. Why not cap CEO pay at a limit of 25 times the pay of the lowest-paid employee in the company?

I realize that this would be viewed as "communism" by rabid foaming-at-the-mouth American right-wingers, but it's not unreasonable. 25 times is still a huge multiplier. It is hardly equivalent to forcing everyone onto the same level.

Since most CEOs receive the bulk of their compensation as stock instead of salary, this would be pretty hard to enforce for pre-IPO companies.

Consider, I'm pre-IPO company that is ridiculously successful, but I have no official valuation on my shares. So I can offer a deal boatloads better than a public company by offering tons of "worthless" shares to my top executives which they know will be worth millions in the near future. This would give me one hell of an advantage don't you think?

I'm not saying I'm against reigning in executive pay, but I don't see a good way to do it across the board.

[Surlethe]

3) No Shareholder Control: Contrary to layperson belief, the pay packages of CEOs are not voted on by the shareholders, they are set by the company board of directors. Especially in the US (where business ethics is not a required, or even encouraged course for MBAs) there is a lot of incest where the CEO is personal friends with many of the board members and they use this influence to grant enormous pay packages that have nothing to do with performance.

This. It's known as the "principal agent problem" in economics: what happens when an agent assigned to act in the best interests of another individual or group (in this case, the board of directors acting for the shareholders) faces incentives to act at cross-purposes to those interests? And how can it be controlled? When shareholder oversight is lax or nonexistent - for instance, if 70% of a company is held by institutional investors (off the top of my head; I think this works) - or the only interested shareholders are the top executives, you can absolutely get such incestuous relationships between top management and the board. (As an aside, the principal agent problem is one reasons CEOs are often paid in inaccessible stock options: so their income and wealth is directly related to corporate performance.)

Interestingly, exactly this problem is also present in democratically elected governance.

[Surlethe]

The paper referenced in the OP's second article is quite instructive: http://www.mdpi.com/1099-4300/11/4/766/pdf I recommend reading it; the mathematics are really not bad at all, and it has some interesting conclusions: essentially, pay for the bottom 90%-95% of employees is in line with what their model predicts, and it only breaks down at the top end of the spectrum where rent-seeking expenditures begin to pay.

[bobalot]

The people who claimed that these enormous pay packets attract the best people have never provided convincing evidence that their claims work in reality.

Like the article pointed out, CEO's overseas get paid far less and still do pretty much the same job at the same performance. That should have been enough to debunk this bullshit claim years ago.

[LMSx]

Speaking of baseball, I've often wondered what a sabremetric style approach to CEO pay/evaluation would turn out- maybe a sort of "replacement-level executive" standard? Although you'd have to find the right substitute for wins...

[Stark]

Reactions to financial incentives are a complex issue, even just in the recruitment space. Many people FEEL motivated by having financial incentives available or achievable, but only very few people actually benefit tangibly from this kind of 'striving'. Some of those who like to know about incentives or rewards (or achieve theme) are those who like to reputation-manage, enjoy status or being in charge of people, and NOT those who necessarily perform better. The point about deliberately under-budgeting to 'beat' budget goals is absolutely classic gaming, which should be obvious to anyone who thinks about bonuses.

The idea here that 'feels motivated by financial incentives' doesn't mean 'is actual motivated to improve performance' is fascinating; separating how someone sees themselves or their reactions from their actual reactions or performance in reality is very difficult.

[The Kernel]

As an aside, saying that other countries don't have dysfunctional pay scales though isn't true at all. My company has a branch in India and I've been doing some hiring out there so I learned a little about pay scales. In the US, direct managers tend to make ~30%-50% more than their reports at the absolute maximum (I'm talking about in the high tech field here, but I think the same is true in most professional organizations) while in India managers make 5x-7x what their reports make (there is a HUGE demarcation between individual contributor and manager in India whereas in the US it's just not that big of a deal).

[B5B7]

A big problem with the bonus schemes also is the bonus is assigned upfront - it is definitely not performance based. It is like paying someone to build something for you and giving them all the money in advance, and even if they leave the job half finished they can walk away without penalty, leaving you in the lurch.

[Darth Fanboy]

Well, let's put it this way.

Amount Phillies paid for a win (Opening day salary $113 million, 93 wins): 1.21 million
Amount Yankees paid per win (Opening day salary $201 million, 103 wins): 1.95 million

Phillies won 93 games you say eh? That would make them the THIRD PLACE team in the AL East division where the Yankees play. The Yankees' direct competition was the Boston Red Sox, a much better team than anyone the Phillies faced in their own division. Also in the American League are the Angels, who finished with 97 wins and provided a formidable opponent in the Conference championship. The Angels had a better record than any National League team and were second only to the Yankees.

What does this establish? The Yankees had tougher competition. In order to compete against the better teams in the American League the Yankees needed better players, so they would have to spend a little more money at least wouldn't you think?

Let's also remember that the Yankees spent money on big name players that are going to generate more revenue as well. Sabathia, Burnett, and Teixeira more than likely sold their fair share of player merchandise as well as helped boost ticket sales along with their other job of keeping the team competitive.

Even though the Yankees won 10 more regular season games than the Phillies, they are grossly more inefficent when it comes to amount of salary per win. Where does this inefficency stem from? Is it overvaluing of players? Of course.

Don't forget that they won two more postseason games also, and the Yankees pay more because they want to win those games especially.

Yes they were not as efficient as the Phillies, but their strategy paid off because they accomplished their objective and will reap the rewards from it. Ever since 2003 we've been plagued by bad contracts and overvalued players. This year the Yankees got so much cash off the books from bad contracts that they were able to sign three big name free agents and still reduced payroll by roughly ten million dollars. That is a problem with the guys in the front office, not the guys on the field.

Let's go deeper:, let's look at their respective right-fielders for example:

Jayson Werth: .268/34/99/.879 WAR: 4.7. Total 2009 salary: 2.5 million.
Nick Swisher: .249/29/82/.869 WAR: 3.5. Total 2009 salary: 5.4 million.

So you're using stats from this season for this comparison? Maybe you should take a look at their numbers from BEFORE they signed their contracts. With the benefit of hindsight we can pick out numbers all the time. Werth's numbers from when he was with the Dodgers and Toronto were not much to write home about. As he has improved he has made more money, when his next contract comes up he will be making a lot more money.

Meanwhile Swisher was acquired via trade with Oakland, the Yankees did not come up with his contract. Now when they traded for him they knew what they were getting into the with the contract but i'm bringing this up to point out that it wasn't the Yankees who decided to first give Swisher so much money, another far stingier club felt he was worth that much money at one point.

Let's also bring up the fact that you're cherrypicking here. I can play that game too. Cole Hamels is making over four and a half million dollars per year but Joba Chamberlain is getting paid just under 500k! Brad fucking Lidge makes 12 million a year? Mariano gets paid more but at least he gets results! (See what I did there?)

If you want to have some fun, A-Roid's 2009 stat line? .286/30/100/.934 WAR: 4.4. Total 2009 salary: 33 million.

And he hit 30 homers with 100 RBI in just 124 games. TEN straight years with 30+ home runs and 100+ RBI. His career numbers are astronomical. And before you say Steroids, the guy hasn't failed one fucking test since Baseball started testing everyone like motherfuckers a few seasons ago. He is STILL putting those numbers. He made his money based on the fact that his previous numbers were outstanding and he has showed no signs of slowing down. He gets paid a lot of money because he makes a lot of money for whatever team he's playing for and it just so happens to be the Yankees right now.

What would you have said about Michael Jordan's salary during his years with the Bulls? Jordan made over $30 million per year playing basketball OVER TEN YEARS AGO. Did we argue that Jordan was overpaid then? He was getting towards the end of his prime after all. It's not like the Bulls sold a shitload of #23 jerseys or that more people tuned in to the games that he played in, or that even in that part of his career he was still way better than anyone else on the court...

Oh, and he's only getting older ad his defense appears to be slowing down which only further drags his value down.

So the Yankees should have let him go elsewhere...say to Boston or LA, and let their direct competition get that much better? So the Yankees should have let him go elsewhere and get paid that much and replace him with exactly WHO at third base? Before you cry "FARM SYSTEM", remember that the Yankees are an organization devoted to winning, and to consider the options that would give them the best competitive advantage. Also keep in mind how much money A-Rod can make for a team as opposed to Pedro Feliz.

If anything he's been consistently overpaid

Lots of baseball players are overpaid. The question is does A-Rod generate the money to make it reasonable to voerpay him? According to this article from 2007 he can bring in more money than his contract is valued at.

and the Yankees, by virtue of being able to drop 1/2 a billion dollars last year in Free Agency, were able to finally assemble a surronding cast that covered up his mistakes.

Yeah that amazing postseason he had really was covered up by his teammates. Let's not forget all the regular season game winning hits he had too, or how his presence forced opposing pitchers to have to deal with Mark Teixiera which boosted his stats tremendously.

Looking at the numbers the Yankees are so grossly inefficent it's little wonder that they don't dominate every year in spite of their monster payroll.

There's that word again, "inefficient." The Yankees aren't just spending extra money to put together a winning team. They're spending money for their immense fan base in order to generate interest and excitement. The Yankees bring in a fuckton of revenue for themselves and the entire league with what they do. YES Network alone could be worth billions of dollars. (source)

And forgive me if this sound like i'm being an asshole, but it does have to be said, the Yankees did beat the Phillies. So it can be argued that the extra money and the rewards that come with it were very well spent this year.

So how does ANY of the above rant have to do with business executives?

Well for one thing in sports it is a helluva lot easier to at least ATTEMPT to justify big salaries based on performance. There are obvious ties to an athlete or coaches ability to affect a team's financial situation with their performance. With these damned business executives, especially the bankers, they make these incredulous claims of being so smart and talented and there really isn't anything to go on for those assholes to try and justify it.

Athlete performance based bonuses are pretty black and white. Score this many points or run for this many yards and you get more money. To me it seems that CEO's fail to demonstrate any sort of direct justification for their bonuses and just take vague credit for all of the good things that happened during their tenure by virtue of their being an executive and nothing else.

[Dahak]

I get a bonus. 30% of my salary is variable bonus, but it is tied to a very measurable item: how many days a year I charge for customers. If I do less than I should, I get less money (up to zilch); if I do more, I get more. I find that a bonus as it should be: measurable and actually tied to performance...

[muse]

I'm not surprised at all. When I worked in the business consulting field where my job was to help companies develop & refine their business plans, one of the problems which kept coming up was how to attract and retain quality talented employees. Businesses which believed they could do so by offering higher pay & more benefits alone wondered why this strategy rarely worked, and were mystified by the lackluster quality of their recruits and dismal retention rates of skilled employees. What they didn't understand was that most of these talented & motivated workers aren't there for the money, they want to accomplish things, challenge themselves, push their abilities, and work in an environment with other such like-minded people. They take pride in doing a good job and accomplishing tasks which few others can. Money doesn't buy job satisfaction for them.

As an example, one of the companies I consulted for poached all the best motorcycle mechanics in its area, almost every other motorcycle shop in town lost their top mechanics to this one company, some of them even taking pay cuts to make the move. Was it benefits? Nope. Working hours? Nope. It was because they treated their mechanics with respect, set the expectations for them, and then got the heck out of their way and let them work their butts off to get the job done. The management knew they had talented self-motivated workers so they mostly stayed out of the way and let them do their jobs.

[Darth Wong]

That's an excellent point: workplace satisfaction has so many contributing factors, and pay rate is just one of them.

One prominent example is a mismatch between responsibility and authority. I've worked at many places where I was responsible for things but was not given the authority to make any important decisions regarding those things. This has a pretty large negative impact on morale. You're telling me that I have to fix or improve something, but you won't let me change any of the policies, operating procedures, or methods involved in that thing! What am I supposed to do, use the Power of Prayer?

[Simon_Jester]

I just can't understand this kind of thing. With a million dollars a year, you can live a very comfortable upper class lifestyle, go on several vacations a year, and still have money left over to invest. Who on earth needs more then that? What do these people do with all this extra cash? Buy a score of cars they'll never drive? Buy a half-dozen houses that they may stay in one or two days a year? I see shows like Lifestyle of the Rich and Famous, with people like this buying custom made pleasure yachts, and I think to myself, "Who needs all this crap?" And then I hear people talk about how much they wish they could have all that stuff, and it just blows my mind.

It's all about being in a position where you can say to yourself "I want X" and not even have to think about whether or not you can afford X. Whatever X is, yes, you can afford it. Even at a million dollars a year, there's still an upper bound to your power of self-gratification; you can't blow, say, fifty thousand dollars on a whim. At least not often. At ten million, you can.

It's stupid, but that's where it comes from. It's not just a question of how much money is enough to live in absolute comfort. It's a question of how much money is enough to live in a standing wave of wish fulfillment at all times.

The people who claimed that these enormous pay packets attract the best people have never provided convincing evidence that their claims work in reality.

Somewhere, some of the huge pay packets are attracting great people who are arguably worth the money. The problem is that it doesn't matter whether they attract great people, because they're also attracting mediocre and crappy people. Money attracts everyone, not just people who deserve it. Which makes the huge pay packets stupid.

It might have made sense to be the first company to offer a ridiculous amount of money to the best executive in the industry. But after everyone else starts doing the same thing, they will rapidly find that they can't all hire the same brilliant person. So most of them make do with random losers... but still have to pay them as if they were legendary geniuses.