UK Executive's Pay Rises 55%.

[KrauserKrauser]

The problem with that argument, Starglider, breaks down when the trend exists with all board members, not just the CEO, getting raises nonreflective of company performance.
Sure, stece jobs is probably worth $50+ a share to Apple shareholders but isevery board member as valued? Why does their raise not reflect the performance of the company.

If all the employees in the company don't get raises but the board votes for record salaries for themselves, where is the recourse available?

Especially when we will not allow for the complete burndown of a bloated sector and have the market punish the offending companies by propping up the worst offenders with government dollars.

[The Kernel]

Especially when we will not allow for the complete burndown of a bloated sector and have the market punish the offending companies by propping up the worst offenders with government dollars.

Sure, if companies receive government bailouts then obviously we can enforce different pay standards but you can do this in the context of these companies now being owned by the government.

Besides, you are focusing on a relative handful of organizations that have been saved through bailouts and ignoring all the other companies that the government let burn rather than intervene. Bailouts are the exception, not the rule.

[The Kernel]

Taking a quick look at the FTSE 100 company stats, pre-tax profits are up 53% which on the surface would justify the bonuses. However, revenues are up only 2.3% and earnings per share 2.8%, which suggests that the profits were either taxed away, the result of issuing shares, or a combination of the above. I don't have time to dig through 100 quarterly reports to find out what's going on. On top of that you can add fishy accounting, some of the banks for example have claimed profits by reducing or eliminating their loan loss reserves and booking the money as profit.

Going by the earnings per share, dividends per share, and P/E numbers (31.12), the execs ain't delivering. As an investor I wouldn't be buying those shares, period.

All that proves is that the supply of executives in highly inelastic (which makes sense, it takes decades to train someone for these roles).

[The Jester]

Good for you. I helped conceive and launch a Nokia branded high profile service (as the lead product manager for the project), worked with them for two years to develop it and oversaw a co-development effort across three continents. I've worked with virtually every software focused executive at Espoo, so unless you can claim anything remotely similar you are barking up the wrong tree--I saw firsthand the issues with Nokia from top to bottom.

Okay. It's clear that you have more experience with Nokia's management.

It has everything to do with the vision of the executive team considering that they failed to even recognize the importance of smartphones and their utter lack of competitiveness in the field. Instead of actually promoting a cohesive plan to deal with the threat of Android and iOS they simply kept on milking Symbian and lost massive amounts of marketshare as a result.

Or didn't you notice that they just replaced their CEO over just this issue?

Besides, it's not like they had to throw Symbian away, just push it further and further into the low end of the market. Instead they treated Maemo as a science project for years and didn't put any serious focus into in, choosing instead to put all their hopes into a tweaked Symbian design. This was a stupid mistake and they are paying for it by bleeding marketshare.

You know, for all of your spouting of the importance of upper management, it's amusing to see your retrospective solution for Nokia's problems contained in two paragraphs and even deride the intellect of those in upper management as being substandard. One would think that if the skills were as easy as what you seem to insinuate here, obtaining qualified people to fill those roles mustn't be too difficult, right?

Sorry to burst your bubble but execution, while crucial, is simply not as easily swayed by the actions of a single individual. A good or bad strategic decision by a key executive can mean the difference between billions of dollars whereas you could kill any engineer (or ten engineers) at Nokia, Apple or any other company without any serious impact to their bottom line.

Execution is fundamentally a team effort whereas strategic direction is not. And that's coming from someone who is entirely focused on the execution side of things and only dabbles in strategy.

Err... How does this actually rebut anything I actually said. Sure, there can be a greater deviation in results from decisions stemming from higher management positions (if management is packed by total retards), but fundamentally, the actual execution still requires the lion's share of qualification and talent. It's far easier to fill a manager's role with an engineer than to fill an engineer's role with a manager (especially if the manager does not hold the relevant qualifications, which many don't).

Don't try and shift the burden of proof onto me, it was you who claimed that executive compensation is out of line to their value now go prove it.

Oh, for fuck's sake. I gave a peer-reviewed study providing a model that fits the data very well, especially given its simplicity. Furthermore, I provided studies illustrating mechanisms for why reality breaks from the model in reality for those at the upper edge of the distribution. Your rebuttal to that study was to handwave it all away. Can you provide a single citation or piece of original research to back up any of your claims about executive compensation?

Seriously, do you actually understand how burden of proof works?

The only valid point that paper seems to make (I'm not going to spend time reading over all 37 pages if you aren't going to adequately quote) is that corporate boards of directors are driven solely by maximizing shareholder value and that this fact is not easily discernible to shareholders. I agree with that.

Okay. I agree that my quoting is insufficient. I'll add more if necessary, but for now, I think it'll just bog down the debate. Other papers I've referenced should suffice for now.

All that paper does is prove that shareholders need more transparency and control over executive compensation,

So you agree that the level of transparency required is not presently in place?

not that high levels of compensation are morally wrong.

You know what? I'm not arguing that they're morally wrong. I'm arguing that they're not justified by any evidence.

See above. The fact that the process by which executive pay is set is corrupt within many corporations does not change the fact that there is nothing inherently wrong with paying executives lavishly.

No. But it does show that presently paid CEO compensation is in no way correlated to their performance.

(With regards to croyism.)

Of course there is. So what?

So how much of that aggregated 55% climb in CEO compensation is actually justified?

If they don't then they are going to be at a competitive disadvantage against companies that hire competent CEOs and pay them more reasonable amounts of money. That's where your argument truly fails--if executives are as overpaid as you seem to think and if this really did cripple the bottom line of organizations then these companies would implode and be replaced by ones that didn't make these mistakes. It's the law of free market economics.

Man of straw. Please show where I stated that purely poor CEO performance had a crippling effect on corporate bottom lines. Could it be that corporate performance is dependent on a number of other factors outside of CEO performance, like I've been postulating?

Going from the study that I posted earlier, the top 35 US CEOs have a pay ratio of about 1057:1. Significantly higher than any other country. Shouldn't it follow that these CEOs are not just better than their foreign counterparts, but significantly better by huge margins? After all, they wouldn't be compensated by so much if they didn't offer enormously more value to the company, right? Isn't that the logical conclusion based on your "law of free market economics"?

In fact most of your "evidence" is based on companies which went down in flames (such as Enron and Global Crossing), proof that companies that value cronyism over performance are ultimately doomed.

WTF?! Where?

Not in the first paper.

The theory estimates that the top 35 U.S. CEOs were overpaid by about 129 times their ideal salaries in 2008.

Oh, the second has 37 pages. Must mention Enron and Global Crossing somewhere in there... Nope. Doesn't appear in any search. Just referencing Execucomp and Compustat.

Third maybe?

Contests over the team that would run the (stand-alone) firm in the future occurred in about 80 companies, among the thousands that are publicly traded, during the seven-year period 1996-2002.

Oh, it's in the paper on Cronyism since they mention Enron in the conclusion.

We use data from Standard and Poor’s Execucomp and COMPUSTAT data sets and hand-collected data.

Oh... Fuck! You got me.

I don't see anyone complaining about Hollywood movie stars earning >$5m a year.

There's a difference in that CEOs have significantly more effect on the lives of ordinary people compared Hollywood actors.

EDIT: Which would make them more of a target.

[The Kernel]

You know, for all of your spouting of the importance of upper management, it's amusing to see your retrospective solution for Nokia's problems contained in two paragraphs and even deride the intellect of those in upper management as being substandard. One would think that if the skills were as easy as what you seem to insinuate here, obtaining qualified people to fill those roles mustn't be too difficult, right?

Having worked at Nokia, you know full well that they get defensive whenever anyone brings up Symbian's shortcomings. The executives that work there lack perspective (which is why they brought in an outsider for their new CEO) and have been with Nokia most of their life. They have a serious case of tunnel vision with regards to this issue.

And recognizing the problem and getting the corporate inertia behind a change are two different things. It's easy to highlight Nokia's deficiencies but cutting through all of the layers of management to redefine strategy is hard.

Err... How does this actually rebut anything I actually said. Sure, there can be a greater deviation in results from decisions stemming from higher management positions (if management is packed by total retards), but fundamentally, the actual execution still requires the lion's share of qualification and talent. It's far easier to fill a manager's role with an engineer than to fill an engineer's role with a manager (especially if the manager does not hold the relevant qualifications, which many don't).

Sorry but it is much harder to find a qualified manager (especially at the executive level) then a top shelf engineer. Have you ever tried to recruit for these positions?

Oh, for fuck's sake. I gave a peer-reviewed study providing a model that fits the data very well, especially given its simplicity. Furthermore, I provided studies illustrating mechanisms for why reality breaks from the model in reality for those at the upper edge of the distribution. Your rebuttal to that study was to handwave it all away. Can you provide a single citation or piece of original research to back up any of your claims about executive compensation?

Seriously, do you actually understand how burden of proof works?

The economics of this are very straightforward. Let's take a large Fortune 500 company like Microsoft as an example--this is a company with ~$230 billion in market cap where a move of a single dollar in the share price is worth $9 billion. If the head of a business unit at Microsoft can manage to launch an innovative new product that causes the stock to go up by even $.50 a share it translates into billions of dollars of shareholder value. $10 million a year salaries are peanuts compared to the amount of value these guys can control.

So you agree that the level of transparency required is not presently in place?

It's not a constant (as this varies from company to company) but for the most part yes.

You know what? I'm not arguing that they're morally wrong. I'm arguing that they're not justified by any evidence.

And I'll repeat that if executives are overpaid for the value that they deliver, that will cause the company who is overpaying their executives to have a competitive disadvantage over those that don't.

No. But it does show that presently paid CEO compensation is in no way correlated to their performance.

No it shows that it isn't always correlated to their performance. This is an absurd no-limits fallacy.

So how much of that aggregated 55% climb in CEO compensation is actually justified?

Because of the extreme inelasticity of executive supply there isn't always going to be a direct correlation. If the supply of oil goes down 5% and it causes a 50% jump in price would you argue that the new prices are unjustified?

Man of straw. Please show where I stated that purely poor CEO performance had a crippling effect on corporate bottom lines. Could it be that corporate performance is dependent on a number of other factors outside of CEO performance, like I've been postulating?

You can't have it both ways, either it has a material impact on the earnings of a company or it doesn't. If it doesn't then executive compensation doesn't matter.

Going from the study that I posted earlier, the top 35 US CEOs have a pay ratio of about 1057:1. Significantly higher than any other country. Shouldn't it follow that these CEOs are not just better than their foreign counterparts, but significantly better by huge margins? After all, they wouldn't be compensated by so much if they didn't offer enormously more value to the company, right? Isn't that the logical conclusion based on your "law of free market economics"?

No, where does free market economics say that supply and demand for one item (executives) requires a logarithmic relationship to totally unrelated items (other employees)?

There's a difference in that CEOs have significantly more effect on the lives of ordinary people compared Hollywood actors.

What does that have to do with anything?

[bobalot]

Can someone actually prove that paying CEO's obscene amounts of money actually improves performance?

[Xon]

Lets start with a simplier question, is there any proof that paying CEO's obscene amounts of money actually impacts performance at all?

[cosmicalstorm]

Yeah I have heard of way too many occasions where these people create utter disaster and still earn huge checks for their work later. It's been brought up many times that if any other kind of professional misbehaved the same way on (by proportion, or scale) he would be fired without a doubt and possibly prosecuted.

[Fingolfin_Noldor]

Quite frankly, the only real problem is that the lack thereof of a penalty if they screw up. Kicking them out of the job these days doesn't do much apparently. Their buddies will just invite them over for a new one. If they really screw up, some heavy penalty, like a kind of fine, must be imposed. But I don't think that will ever happen.

[The Jester]

And recognizing the problem and getting the corporate inertia behind a change are two different things. It's easy to highlight Nokia's deficiencies but cutting through all of the layers of management to redefine strategy is hard.

And dependent on a number of other factors aside from CEO vision?

Sorry but it is much harder to find a qualified manager (especially at the executive level) then a top shelf engineer. Have you ever tried to recruit for these positions?

So your rebuttal to my point is to, not rebut it and just say that hard to find people that meet your qualification criteria. Seriously, how many times have you actually fully understood what an engineer is talking about when he has given any explanation that has involved non-trivial formulae?

The economics of this are very straightforward. Let's take a large Fortune 500 company like Microsoft as an example--this is a company with ~$230 billion in market cap where a move of a single dollar in the share price is worth $9 billion. If the head of a business unit at Microsoft can manage to launch an innovative new product that causes the stock to go up by even $.50 a share it translates into billions of dollars of shareholder value. $10 million a year salaries are peanuts compared to the amount of value these guys can control.

This empirically demonstrates that CEO compensations are in line with the value they generate how? It's clear that you don't understand this whole burden of proof thing at all. You do realise that when someone cites academic papers which propose models that fall in line with real world data, it's not enough to imagine hypothetical scenarios, presume that all of your assumptions hold true and then think that it presents a valid rebuttal. You actually have to demonstrate that real world reflects your hypothesis.

BTW, I know it's not actually your argument, but I find it amusing that indirectly invoke this guy in your attempt to justify CEO compensation. The biggest irony is that he was only earned a compensation of $1.3 million in 2009 (previous years are very similar). With a company of Microsoft's size, this actually falls in line with scenario 3 (mean wage of $80k) of the study I cited.

Academics? Academics? Academics?

EDIT: Apologies. I made a mistake with the above calculation and this is not correct. He earns 52 times the minimum when the model predicts ~16. Still, it's not anywhere close to many of the other CEOs on the list.

So you agree that the level of transparency required is not presently in place?

It's not a constant (as this varies from company to company) but for the most part yes.

Okay, so when you say most part, where in the range of 50-100% do you think it lies?

And I'll repeat that if executives are overpaid for the value that they deliver, that will cause the company who is overpaying their executives to have a competitive disadvantage over those that don't.

So? Firms (especially large firms) are extremely complicated in nature with their competitiveness affected by a very large number of factors. Even with an overpaid CEO, it's still possible for a firm to maintain a strong competitive edge.

No. But it does show that presently paid CEO compensation is in no way correlated to their performance.

No it shows that it isn't always correlated to their performance. This is an absurd no-limits fallacy.

Okay. It shows that there is a significant amount of corruption involved with setting CEO pay. This, and the fact that there are no studies that show lavish CEO compensation is justified means that there is no evidence to support the belief that lavish CEO compensation is correlated to their performance.

Because of the extreme inelasticity of executive supply there isn't always going to be a direct correlation. If the supply of oil goes down 5% and it causes a 50% jump in price would you argue that the new prices are unjustified?

The thing is that a supply of oil is measureable. I'd love to know how you measure the supply of executive talent. Given that we only observed a rise in oil prices would you that such a dramatic rise is not caused by speculation or market manipulation? Would a continually rising market price for property (well beyond what's generally affordable) be indicative of a sound investment or a speculative bubble? Over the past 30-40 years, we've seen executive conpensation grow significantly in much the same way we saw housing or oil (during 2003-2007). Particularly in the US, we've seen these it grow extremely rapidly. What are your reasons for believing that executive pay is not a similar bubble?

You can't have it both ways, either it has a material impact on the earnings of a company or it doesn't.

Holy black-and-white fallacy Batman! You know, there is some middle ground between crippling effect and no effect whatsoever.

If it doesn't then executive compensation doesn't matter.

Wait? So if executive performance doesn't have a massively significant effect on company performance, then their compensation doesn't matter? Seriously... I'm not following you here at all.

where does free market economics say that supply and demand for one item (executives) requires a logarithmic relationship to totally unrelated items (other employees)?

Bwahahaha! So you're saying that the value provided by executives is independent of the value provided by the workers working under them? Really?

What does that have to do with anything?

Err... It's a reply to Starglider and unrelated to you?

Lets start with a simplier question, is there any proof that paying CEO's obscene amounts of money actually impacts performance at all?

There are about as many academic papers showing this as what there are invisible dragons in my garage.

What The Kernel is basically assuming a priorically is that the market price for an executive is an accurate reflection of the amount of value that they provide to a corporation. He assumes that the market is rational and will correct any distortions in valuation. There is no actual evidence to support any of these assumptions.

[The Jester]

EDIT: Apologies. I made a mistake with the above calculation and this is not correct. He earns 52 times the minimum when the model predicts ~16.

Ghetto edit: Assuming the minimum wage at Microsoft is $250000. If it's higher, this value goes up.

[The Jester]

Ghetto edit: Assuming the minimum wage at Microsoft is $250000. If it's higher, this value goes up.

Fuck me. $25000. Actually, thinking about it, this should be a reasonable estimate for an intern.