CEO Pay

[El Diablo]

BPA: I've served on numerous compensation committees and boards. Many elements of deals are structured because keeping the existing framework in place is in the best interests of many of those involved in the process.

You also say "I assert that this is the fulfillment of the economic theory behind the compensation plan." in response to my question regarding bonuses. The thing is, the lion's share of compensation is often awarded "at the Board's discretion" so it fulfills the "agreements in place" even though it's often undeserved.

What you don't seem to be aware of is that much of what goes on when it comes to corporate governance, and specifically compensation, has more to do with optics than performance. The CEOs are aware of this, and many take full advantage of it.

Melchy: The BOD does not report to the CEO, in fact, the opposite. However, in many companies, the CEO is also the Chairman, who leads the BOD. There's been a big push towards separating those two roles and more often having non-executive outside Chairs.

[El Diablo]

BPA,

In another post you write:

"should educate themselves on subjects before taking positions that are not derived from a factual basis."

I agree completely and think your responses reflect the statement below, except perhaps replace google and wiki with textbook:

"in my mind equates to a scene of someone tra lal lalling through life making broad, uneducated generalizations about subjects that they are 1-google hit deep on and/or one wiki entry read"

[MidGe]

[ QUOTE ]
Then you could exploit these companies' bad strategy by shorting their stock, or by investing in competitors who don't pay their executives excessively.

Regards,

C.T. Jackson

[/ QUOTE ]


No, I couldn't. See my post above. IMO, whether a company or a specific CEO succeeds or not is mostly variance.

[Propertarian]

[ QUOTE ]

It shows it fairly well. No employer will pay someone more then they produce (you could feasibly go without a CEO or higher someone with no CEO experience if every single person interviewed demanded more money then one is worth), nor will any employee accept lower compensation if another employer offers better.

Given the conditions you hinted at, pay equals marginal productivity as percieved by the market participants.

I'm not sure on what grounds you would deny this.


[/ QUOTE ] I don't exactly; what neoclassical econ claims is that it equals REAL marginal productivity.

The transaction costs are very high here, especially for employees looking for jobs (how the [censored] are they supposed to know how much every employer around will pay him/her? Seems like a huge ammount of interviewing and time just to find out if they will get hired or not), and the informational problems tend to range from great to insurmountable. Marginal productivity hasn't even been measured for most employees, and for good reason: it's impossible to seperate one person's contribution from another's in most cases.

I've given a restaurant example before; I'll include the CEO here. Jim waiter sells 1,000 dollars worth of food in an eight hour shift. Is his productivity 125/hr? Well, no. Because the cook made the food, the host took the person to the seat, the assistant manager trained him, the manager supervised him that day, the general manager made the schedule and did all the paper work, the marketing department informed people of the existensce of the restaurant, the janitor and bus boys and girls and the dishwasher cleaned up, someone else built the building, the CEO hired the upper management who in turn hired the lower mgmt etc.

How much of did each contribute to the overall gross (or net) profit? Nobody really knows, except that it is ZERO, individually. Each individual contribution is worthless by itself. If the food doesn't get served, who cares if it is cooked. IF the food isn't cooked, who cares if it gets served. If the restaurant is built and no food is served, or vice versa, zero. And so forth.

It is not possible to seperate the contributions of the different employees; nobody has any clue how much value CEO Jane, worker Jim, or manager Joe contribute to the overall piece, in no small part because CEOs, workers, and managers don't have individual productivity, they have collective productivity.

[Propertarian]

As for the "incomplete contract" part, saying that one's pay is caused by marginal productivity doesn't make any sense, because one's productivity changes when one's pay changes.

Since labor contracts are incomplete i.e. the owner is just purchasing the worker's labor time; the contract does not gurantee that any actual work will be done, if it did the owner could sue the worker if he/she did not produce a certain quantity/quality of goods/services, the owner must extract work from the employee. Two methods are available: the carrot and the stick. By paying the worker more, the employer raises the cost of job loss, thus inducing the worker to work harder in order to avoid losing his/her job. Or/and, by offering the employee rewards/incentives to produce more quantity/higher quality work, the employee's productivity improves.

This isn't even getting into any negative psychological or health effects that low pay has which could effect job performance, or positive ones for high pay.

In other words, the causal arrow is backwards, at least to a degree: it is not simply that low productivity causes low pay, but that lower pay causes lower productivity.

[lehighguy]

That's like saying if we instantly gave every child in America an straight As, they would all of a sudden know how to do calculus.

[Misfire]

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First off, why do you care? It's not your money.


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[Propertarian]

No, it's not. I said "at least to a degree"; it has some effect, mostly in terms in making it more likely someone lives up to their potential, whatever that is, for one thing.

Also, kids don't get fired for not getting good grades, don't need to be in school in order to, you know, eat, they are young and undisciplined, and money is a much stronger incentive than grades for most people. Give kids a few k for learning calculus, and I'm pretty sure we have more kids who know it. Give your worker $100 for meeting his quota that week, and you have a lot more workers meeting their quota.

Not at all analagous to what you said.

[canis582]

[ QUOTE ]
[ QUOTE ]
First off, why do you care? It's not your money.


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[/ QUOTE ]

It is if you work for one of these money crazed lunatics.

[Propertarian]

Because of a variety of factors, human flourishing/well-being would be increased if a larger % of that went to the workers as opposed to the CEO.

I care about human well-being, not about "whose money is whose".