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Author Topic: Occupy Wall Street and the sad state of American protesting
happymann
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I found this article very interesting. It's a long article by G. William Domhoff, professor of psychology and sociology at the University of California, Santa Cruz. I wasn't completely surprised by most of his numbers (I was expecting the trends, if not the magnitude). What I found more fascinating and more appropriate for the OWS crowd were his comments near the end regarding CEO wealth and the tricks they use to justify CEO pay raises. There's very little in this article that talks about solutions, but I did want to see if others on this board feel that Domhoff has a solid enough methodology that his numbers and conclusions can be accepted (since I'm not an economist or statistician, or anywhere close to one, I have to take him at face value).
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fugu13
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Most of the facts in the article seem about right, but he's spinning them like crazy. For instance, the "what percentage of wealth should people have" for various slices of the population is probably being interpreted more in the context of income, which for many people is a truer measure of wealth than actually measuring total wealth.

Some of his causative stories are all out of whack, too. The cuts in capital gains weren't anywhere near enough to explain the growth in income of the top 400 people in the US; that growth is better explained by the high gains of the stock market itself in the period he's talking about (which occurred because of the great moderation). I mean, his story doesn't even make the vaguest sense: according to him, keeping approximately 15% more of before tax income was enough to sextuple incomes among the top 400. I can't even imagine the weird amplifying effects he'd need to theorize to say that was what happened.

In fact, if he is theorizing the capital gains tax change is what caused that, it seems more likely he would be overjoyed. By cutting the tax about in half, total tax revenue on that part of the population went up three times! Now, that's probably before inflation, so it only went up maybe two times. Still, a huge gain. (Of course, he isn't, and I grant a lot of that is his money is power position; I'm very leery of that position, because in any non destitute society it is going to be true that a substantial chunk of the wealth will be in the hands of a relatively small number of people, and so it seems he will always consider things extremely problematic. There needs to be some rational discussion of the tradeoffs).

Then he starts getting weaselly (and arguably contradicting himself), leading off here:

quote:
It is widely believed that taxes are highly progressive and, furthermore, that the top several percent of income earners pay most of the taxes received by the federal government. Both ideas are wrong because they focus on official, rather than "effective" tax rates and ignore payroll taxes, which are mostly paid by those with incomes below $100,000 per year.
But then he shows the chart that the top 20% pay 64% of all taxes -- and he carefully doesn't show what percentage of taxes smaller portions of the top 20% pay, or the percentage of *federal* taxes paid by those groups, which is higher -- which would show that, indeed, "the top several percent of earners pay most of the taxes received by the federal gov't", something he's just said is wrong!

Then he starts going into paranoid conspiracy theories:

quote:
So the best estimates that can be put together from official government numbers show a little bit of progressivity. But the details on those who earn millions of dollars each year are very hard to come by, because they can stash a large part of their wealth in off-shore tax havens in the Caribbean and little countries in Europe, starting with Switzerland.
The US has many tax problems, but if he's worried about the situation looking more equitable than it is due to tax avoidance, the US is the last place to start looking: many major European economies (that he holds up as comparatively better examples) have *far* higher rates of tax avoidance. We're pretty good at actually collecting tax, and many of the rules he holds up shortly after as letting the wealthy avoid tax are there to make sure we do tax, and tax accurately.

More manipulative rhetoric comes up when he calls an 18% reduction in the gini coefficient due to progressive taxation and transfers things that "don't do much to reduce inequality". As a portion of the gini scale, the reduction is roughly equivalent to the difference in inequality between Egypt and Norway. In other words, a lot.

The CEO pay section can be mostly ignored. Once you control for company size, CEO pay in the US is not nearly so outsized compared to Europe (we have much bigger companies), and once you control for company profitability, almost all the rest disappears (we have more profitable companies). So even if the process for determining CEO pay is so completely bankrupt as in his examples, it somehow sets the bar about where you'd expect for companies of a given size and profitability. He also ignores that CEOs in certain countries (especially China, as a handy example) extract greater political power *instead* of higher salaries -- it isn't always a correspondence (far from it).

I'm sad that by the end he pretty much gave up credibility; it started out reasonably strong. Mostly I'm sad because there is a strong case to be made for increased redistribution of wealth in the US, and I am very for it -- but I dislike those who can't resist saying things that are obviously false about the very facts they just presented, probably assuming nobody reading the article would inspect the actual numbers too closely.

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Bokonon
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quote:
Originally posted by Rakeesh:
quote:
Its clear they lack the confidence in their platform and are unable to stick to their guns and unwilling to face directly the people they have had such an easy time demonizing from the safety of their 1% bought political positions.

Is there a politician in this country who has sufficient confidence in their platform to go and speak before what will likely (again, if true) be a hostile, unruly, pre-planned crowd of opponents? Lemme know when you find one, k, and I'll credit your accusation of cowardice as something more than a totally partisan, "Ha!"
Well, there was this guy.

NOTE: I don't believe this event exactly meets Rakeesh's criteria. I don't believe that "unruly" applies in this case, but "hostile" and "preplanned crowd" of opponents do.

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Dan_Frank
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quote:
Originally posted by Orincoro:
T:man's reaction is more one of incomprehension. You forget that there was a period of your life when you would have found it hard to believe that someone would trust you enough to get work done, that you were being payed good money for, on your own at home, without their supervision. For people like me who entered the workforce during difficult financial times, that kind of an arrangement is a pipe-dream.

Well, it's sort of a pipe dream for me, too. I changed jobs in August. I used to work an 8-5 office job in the financial industry, but I was getting frustrated and feeling stagnated, so I quit. And now I have a come-in-whenever-you-feel-like-i-or-just-telecommute job working for a software consultant. So, I definitely understand having a hard time wrapping your head around it.

I must have misread him, I think, because the way he said it to me felt more critical. Like, "I can't understand that lifestyle" is the sort of thing I used to say to a former friend regarding his relationships with women. And it was not a judgment neutral statement.

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Destineer
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quote:
Once you control for company size, CEO pay in the US is not nearly so outsized compared to Europe (we have much bigger companies), and once you control for company profitability, almost all the rest disappears (we have more profitable companies). So even if the process for determining CEO pay is so completely bankrupt as in his examples, it somehow sets the bar about where you'd expect for companies of a given size and profitability.
I'm not sure exactly what's meant here by controlling for the size and profitability of companies. What is the correlation supposed to be? Should one expect that a company of twice the size (in terms of total holdings, I guess?) would naturally pay their CEO twice as much? Would a company be expected to pay the CEO twice as much if it's twice as profitable?

One wouldn't necessarily expect rank and file workers to make appreciably more money working for a larger or more profitable employer. Why should that hold for CEOs?

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fugu13
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Destineer: first, a thought experiment. Does it make sense for someone who is the CEO of a small company with five million dollars in revenue to be paid the same as someone who is the CEO of a company with a five hundred million dollars in revenue? No, CEO pay shouldn't scale exactly with company size (and I wasn't saying it should), but there is a definite correlation between company size and reasonable CEO pay, because the CEO of a larger company carries more responsibility.

If two companies of the same size (and in a comparable industry) have different levels of profit, the CEO of the more profitable one should be paid more: something he's doing is working. I'm not saying the CEO is somehow directly responsible for the higher profit in every case, but somehow his company is doing better than a different, but overtly similar company, and even if his only talent is hiring/not driving away the right people and letting them make the decisions, that's something hard to find in the field of CEOs.

Consider the typical employee of a company, though. Perhaps someone doing quality control of parts. The responsibilities of that worker do not scale up with the size of the company; they presumably are able to check roughly the same number of parts, which will contribute roughly the same amount to the bottom line of the company no matter what the size is. The worker *is* frequently paid more when they are more productive (which is when the work of the things they have influence in is more profitable, just as with a CEO), though, with bonuses and raises and such.

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Rakeesh
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quote:
Destineer: first, a thought experiment. Does it make sense for someone who is the CEO of a small company with five million dollars in revenue to be paid the same as someone who is the CEO of a company with a five hundred million dollars in revenue? No, CEO pay shouldn't scale exactly with company size (and I wasn't saying it should), but there is a definite correlation between company size and reasonable CEO pay, because the CEO of a larger company carries more responsibility.

This seems perfectly reasonable to me. A larger company with more irons in the fire means more risk and complexity, theoretically with more possibility of failure not just because of that, but because of more people looking to better you economically. For those and other reasons it's not surprising or unreasonable that 'pay' (all the various incentives, that is) would be greater for a larger company. I also agree with fugu that this won't be analagous to a lower-level employee, one whose responsibilities and risks aren't going to change as much if they're working for, say, a local oil change place and JiffyLube.

What seems problematic to me, from what little I've read and heard and learned, is the way those incentives are decided and who does the deciding. Specifically, it seems that at the very high ends the people who are doing the deciding are likely to not only hope to become even higher top executives themselves-and therefore want such pay to increase-but their own worth in the present is increased if pay for a given higher level executive is also increased.

It doesn't seem to work that way elsewhere. If Joe service mount tech gets a raise, chances are it wasn't decided by his assistants and peers-and that raise doesn't make him that much more valuable in the near future, either.

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TomDavidson
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quote:
the CEO of a larger company carries more responsibility
Perhaps the idea that CEOs actually bear responsibility -- as opposed to simply having to be paid as if they bore responsibility -- should be examined a bit.
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Rakeesh
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quote:
Perhaps the idea that CEOs actually bear responsibility -- as opposed to simply having to be paid as if they bore responsibility -- should be examined a bit.
Well, I will agree that by the time they get to that level it seems that the consequences they bear are going to be 'reap enormous financial benefits' if they're successful, and 'lose their job/face demotion with a substantial parachute' if they fail, barring all but the most egregious screw-ups. But I'm not very well informed on the subject.
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Destineer
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quote:
Does it make sense for someone who is the CEO of a small company with five million dollars in revenue to be paid the same as someone who is the CEO of a company with a five hundred million dollars in revenue? No, CEO pay shouldn't scale exactly with company size (and I wasn't saying it should), but there is a definite correlation between company size and reasonable CEO pay, because the CEO of a larger company carries more responsibility.
That makes some sense, although one would also expect the CEO of a larger company to have a correspondingly larger and more supportive staff.

The real question I was trying to get at is, why should one conclude that the disparity in pay between CEOs of large, profitable companies versus small, less profitable ones is reasonable? You seemed to be saying before that the difference in pay between big US CEOs and small European ones is about what we should expect. Why is that?

I mean, look at the disparity in compensation in other important administrative fields. Like educational administrators. The president of Harvard might make 10 or 12 times as much as the president of Northern Michigan University, but that's nowhere near the difference between top CEOs and below-average ones. Yet the same considerations you cite apply here: large differences in scale and performance.

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fugu13
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quote:
The real question I was trying to get at is, why should one conclude that the disparity in pay between CEOs of large, profitable companies versus small, less profitable ones is reasonable? You seemed to be saying before that the difference in pay between big US CEOs and small European ones is about what we should expect. Why is that?
We've got a lot of data that tell us what the approximate relation between firm size (and lots of other factors) and CEO pay are. We can use standard statistical tools (regression) to determine how close the CEO compensation data we see in the US is to what we would expect, given the various properties of firms in Europe, the pay of CEOs in Europe, and the properties of firms in the US. That doesn't show that the pay isn't necessarily outsized, but it does show that the pay isn't any more unusual (well, not much more, it does tend to be somewhat higher), but it does show that the pay isn't much outsized compared to Europe, and since a lot of people play up the comparison between US CEO pay and Europe CEO pay, that undermines a lot of the argument.

For instance, in the period when CEO pay grew six times (roughly) at the largest companies in the US, those companies also grew six times. A six times increase in pay doesn't sound so completely outrageous, all of a sudden. It might be high, but it isn't so outsized as to be ridiculous.

What's more, while CEO ability only has small effects on the bottom line of a company, when you multiply that by large companies, you get big numbers. For instance, a CEO of a company a few hundred down the list of top companies might reduce performance by one or two hundredths of a percent vs the best pick for the job . . . but at a large company, that variation (among skilled CEOs, not between skilled and bad CEOs) is tens of millions of dollars. Between a skilled and a mediocre CEO, the difference can easily reach hundreds of millions of dollars, while still only representing a few hundredths of a percent of the market value of a firm -- and it is easy to find examples of bad CEOs tanking the market value of a firm by many percentage points.


I *do* agree with the points voiced by Greg Mankiw (which I'm blatantly requoting from a WSJ column):

quote:
But the supply of talent is
inelastic and the allocation of
talent would not be affected if everyone faced high tax rates.

So while I don't think there's anything particularly bad about CEOs being paid what they are, I also am fine with taxing high earners (many of them those same CEOs) at higher rates than they currently are (and I should point out that their compensation is mostly not coming from long term capital gains).

Here's an interesting contrarian view, with some things worth thinking about (such as why people with considerably less worthiness and value creation than many CEOs -- startup founders -- aren't villified when they take far larger payouts).

Btw, a point you'll see made if your ead around a few places (such as here) is, compensation at large private firms is basically in line with that at large public firms. If all that was happening was the boardroom collusion described in the currently fashionable stylized account of CEO pay setting, that wouldn't be the case.

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fugu13
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Regarding this point:

quote:
That makes some sense, although one would also expect the CEO of a larger company to have a correspondingly larger and more supportive staff.
Not as much as you might think. There's only so many people you can use to run an organization without carving the organization up into smaller sections and putting people in charge of them. At some point, the responsibility is limited to a small set of people, and ultimately one (with directorial but not executive oversight by the board of directors). There may be lots more people working under such a person, and I would certainly hope they were better at their jobs at much larger companies, but that's not taking anything away from the fact the CEO has to make decisions about a much larger company, that can make or cost such a company hundreds of millions to billions of dollars depending on which choice the CEO makes. No matter how many people are there giving him the advice on which course is better, and no matter how good they are, the CEO is the one making such decisions, many times a year.
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TomDavidson
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quote:
No matter how many people are there giving him the advice on which course is better, and no matter how good they are, the CEO is the one making such decisions, many times a year.
Which is why, when a company fails, a CEO is generally left destitute and unable to find work in the business world.
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DarkKnight
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quote:
Which is why, when a company fails, a CEO is generally left destitute and unable to find work in the business world.
While I understand that you are maxing out the sarcasm meter, is this what you hope happens to CEO's when a company fails? Would that be your just punishment? They should be left penniless and never find work again?
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TomDavidson
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If their reward is commensurate with the size of the company, so that they earn hundreds of times more than a line worker for shouldering hundreds of times more responsibility, shouldn't they suffer hundreds of times worse than a line worker when their decisions doom their company? And yet they suffer far, far less.
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Rakeesh
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quote:
While I understand that you are maxing out the sarcasm meter, is this what you hope happens to CEO's when a company fails? Would that be your just punishment? They should be left penniless and never find work again?
Well they certainly shouldn't make money-that is, their punishment amounts to 'I won't make as much money as I would have if things had gone well'.

Anyway, he didn't say 'never find work again'. He said 'unable to find work in the business world'. That is to say, if you're a CEO and your company fails, it's a peculiarity that you stand a chance at being able to flit away to another top-executive position.

It's always been strange to me, the conservative willingness to stand up for the big man. The biggest man, in fact-wealthy beyond the lifetime of all but a few, with political, social, and economic power that are likewise never going to come to the vast majority of society. Small government, limit the power of big organizations over our daily lives, individual rights and freedoms and absences of interferences. And somehow, this ideology amounts to, "Hey, hey! Let's not get snippy about CEOs."

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DarkKnight
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How would you make them suffer? If the large company fails, do we raid the CEO's home, seize all of their assets, and blacklist them from ever working again? Maybe throw them in jail without possibility of seeing the light of day because the company failed? What if the company just loses lots of money? Do they get the same percent of their assets taken?
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Rakeesh
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quote:
How would you make them suffer? If the large company fails, do we raid the CEO's home, seize all of their assets, and blacklist them from ever working again? Maybe throw them in jail without possibility of seeing the light of day because the company failed? What if the company just loses lots of money? Do they get the same percent of their assets taken?
Well that's clearly what Tom was suggesting. All of those things together, in fact.
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Destineer
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quote:
If their reward is commensurate with the size of the company, so that they earn hundreds of times more than a line worker for shouldering hundreds of times more responsibility, shouldn't they suffer hundreds of times worse than a line worker when their decisions doom their company?
I don't see much reason why they should. I guess I get a little skeptical when issues about who deserves what get brought into discussions about what's the overall best system in something like economics. It seems to me the question should be, what system leads to the best overall outcomes? If the most beneficial system involves some people getting a better lot than they deserve, so be it.

That said, our present system doesn't seem entirely successful, and the idea that CEO pay is no more than they deserve is (a) ridiculous and (b) not much reason to preserve the present system. But my guess is that fugu is right that the best way to fix the problem is with taxes.

quote:
For instance, in the period when CEO pay grew six times (roughly) at the largest companies in the US, those companies also grew six times. A six times increase in pay doesn't sound so completely outrageous, all of a sudden. It might be high, but it isn't so outsized as to be ridiculous.
But wait, I thought you agreed earlier that there's no reason pay should scale linearly with the size of the company. (That is, there's no reason the CEO of a $500M corp should make 100 times as much as the CEO of a $5M corp.)

Is it just that, when you fit a curve to the pay of foreign executives like you were talking about, you actually do see a linear dependence between size and pay?

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fugu13
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quote:
But wait, I thought you agreed earlier that there's no reason pay should scale linearly with the size of the company. (That is, there's no reason the CEO of a $500M corp should make 100 times as much as the CEO of a $5M corp.)

Is it just that, when you fit a curve to the pay of foreign executives like you were talking about, you actually do see a linear dependence between size and pay?

You only see a 1:1 correlation (linear means something else) in pay increases in the *very* largest companies. In most companies (including those, once you take into account the original salaries) you see that a company that increases in size by 10% has about a 3% increase in CEO pay. That seems to be higher at the top end, but most of the models only fit linear relationships to the overall sample (easier to be confident of the math). In particular, there's a lot more competition in the US for CEOs at the top end: keep in mind that even the tiniest percent difference in company value caused by a CEO will almost certainly amount to tens of millions, and probably hundreds of millions to billions of dollars. Then look at the CEO salaries of the top 400 companies.

quote:
Which is why, when a company fails, a CEO is generally left destitute and unable to find work in the business world.
Which is why, when a worker messes up at the thing they do and are fired, they are left destitute and unable to find work? You've got some messed up morals, Tom, if you think that's what should happen to people who mess up badly at their jobs. Last I checked, normal workers who had that happen were paid whatever their employment contract stipulated, including any severance pay stipulated, and then went and found a new job.

It happens that CEOs that mess up badly do have a much harder time getting hired anywhere, and frequently cease being CEOs. Just like someone who messes up badly at many jobs has a harder time getting hired to do the same job, and frequently leaves that occupation. Sometimes they're able to convince someone that the problems weren't their fault (and sometimes they're right) and get hired again in a similar position.

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TomDavidson
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quote:
Which is why, when a worker messes up at the thing they do and are fired, they are left destitute and unable to find work?
Oh, not at all. Because...

quote:
You've got some messed up morals, Tom, if you think that's what should happen to people who mess up badly at their jobs.
...if the rewards for success must be summarily greater, the consequences of failure should be greater as well. Or should at least exist. Meg Whitman is running Hewlett Packard, for God's sake.
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fugu13
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quote:
...if the rewards for success must be summarily greater, the consequences of failure should be greater as well. Or should at least exist. Meg Whitman is running Hewlett Packard, for God's sake.
Ah, so what's the income cutoff for being left destitute and unable to find work upon messing up your job? You're messed up, Tom.

As for Meg Whitman, she grew a company from $4 million revenue to $8 billion revenue and won numerous awards for doing so. This is what you want rewarded with destitution? What does a CEO have to do to not deserve to be struck down in your book?

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Samprimary
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quote:
Originally posted by TomDavidson:
If their reward is commensurate with the size of the company, so that they earn hundreds of times more than a line worker for shouldering hundreds of times more responsibility, shouldn't they suffer hundreds of times worse than a line worker when their decisions doom their company? And yet they suffer far, far less.

'suffer' is not the word for it, realistically. They don't suffer. They are rewarded.
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TomDavidson
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quote:
Ah, so what's the income cutoff for being left destitute and unable to find work upon messing up your job? You're messed up, Tom.
Excellent question. I'll let the details people work on that. Do we agree that CEOs don't really face any real burden of responsibility, then, since apparently you have to be "messed up" to mention the possibility?

quote:
As for Meg Whitman, she grew a company from $4 million revenue to $8 billion revenue and won numerous awards for doing so.
Is it seriously your opinion that she left eBay in a good position?
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kmbboots
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quote:
Originally posted by fugu13:

quote:
Which is why, when a company fails, a CEO is generally left destitute and unable to find work in the business world.
Which is why, when a worker messes up at the thing they do and are fired, they are left destitute and unable to find work? You've got some messed up morals, Tom, if you think that's what should happen to people who mess up badly at their jobs. Last I checked, normal workers who had that happen were paid whatever their employment contract stipulated, including any severance pay stipulated, and then went and found a new job.

I don't think Tom is suggesting that is what should happen; I think he is suggesting that is what does happen. "Normal" workers don't generally get to have contracts that stipulate huge severance pay packages. Or severance packages at all. "Normal" workers are lucky to get two weeks.
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Rakeesh
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Normal workers do get things like unemployment, though-and as they move up through the middle class, things like severance pay aren't, y'know, totally unheard of.
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fugu13
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quote:
Excellent question. I'll let the details people work on that. Do we agree that CEOs don't really face any real burden of responsibility, then, since apparently you have to be "messed up" to mention the possibility?
A burden of responsibility is not the same as having a required punishment of being destitute with no job. If you look at actual data, you'll see that CEOs that haven't demonstrated high capability as a CEO and are then fired rarely get hired again by companies of similar size or larger. But evidence doesn't seem to matter to you, so I don't know why I bother.

quote:
Is it seriously your opinion that she left eBay in a good position?
Better than when she found it? By a long shot. And if she made some mistakes towards the end, it hardly sunk the company. They've got really strong competition from Amazon, not to mention that the downturn hit a lot of their core customers, but their revenue is going back up again, and their profits are doing even better.

So, you've made clear that you think working long hours in business for thirty years, having a successful upper management career, taking a risky move to a small startup with only a few million dollars in revenue through the dot com crash (which many larger companies didn't survive) and turning it into a multi-billion dollar company, and then messing up some (but still leaving it one of the biggest internet companies in existence) should be punished by destitution, instead of being hired by a company intent on expanding its IT services capabilities and looking for some of the expertise she clearly has. You don't take a company from a few million dollars in revenue through one of the worst periods for companies of your type into multiple billions of dollars in revenue without a heck of a lot of expertise.

As an aside, I find it hard to believe someone as intelligent as you is advocating retribution morality. You're acting like a high schooler who thinks he has all the answers, and they somehow consistently involve making life much worse for people he doesn't like because he doesn't like them.

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kmbboots
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I didn't say they were unheard of, just that they could not be assumed to be part of the experience of "normal" workers. I have a pretty decent (compared to a lot of people) salaried job and if I screwed up - or even if I didn't and they just decided they didn't need me - I would basically get whatever vacation time I had not used.
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TomDavidson
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quote:
A burden of responsibility is not the same as having a required punishment of being destitute with no job.
Oh, absolutely. So do we agree that, because the punishment does not scale with size, the rewards should not, either?

quote:
you've made clear that you think working long hours in business for thirty years, having a successful upper management career, taking a risky move to a small startup with only a few million dollars in revenue through the dot com crash (which many larger companies didn't survive) and turning it into a multi-billion dollar company, and then messing up some (but still leaving it one of the biggest internet companies in existence) should be punished by destitution
I don't believe I've said that at all. I expressed skepticism that Whitman should be CEO of Hewlett Packard.

quote:
I find it hard to believe someone as intelligent as you is advocating retribution morality.
You just offered a justification for CEO salaries based on the same logic.
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fugu13
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quote:
Oh, absolutely. So do we agree that, because the punishment does not scale with size, the rewards should not, either?
No, because that's an insanely stupid thing. Of course rewards scale with things other than risk. They also scale with required expertise and level of responsibility, for instance, two things that are very high for a CEO of a large company.

Whereas, as far as I can tell, your position seems to be that anyone who makes more than a certain amount needs to be prepared to be made destitute for messing up at their job. How about instead of giving an exact number for this cutoff, you give an amount which you're sure will be above the number. Clearly you can manage that, or you wouldn't be able to say so clearly that CEOs of large companies are paid high enough to justify it.

quote:
You just offered a justification for CEO salaries based on the same logic.
If you think this, you should improve your logic. Saying that it is reasonable for people to choose to pay workers who provide returns for a company commensurate pay does not mean it is reasonable to take away all money (note: not just all pay; you said destitute) from CEOs who do not manage provide large returns for a company. I'm not at all sure where you get it is the same logic. Could you provide what you think I've said, in logical statements, and then show that they necessarily imply what you've said?
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The Rabbit
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fugu13, What do you mean when you say the the CEOs of a large company are "responsible" for more? I can think of two ways in which this might be true. 1. The CEO's decisions are more critical and influencial for company performance or 2. The CEO bares a greater portion of the risk.

You've already agreed that the latter isn't true. Is there any reason to believe that the former is true? I would expect that the larger the corporation, the less difference the CEO actually makes, particularly in the short run. In larger companies, I would expect a much larger of fraction of the decisions are made at lower levels and that the CEO would be far more dependent on analysis and advice from staff.

In a small business, the CEO usually owns a major portion of the business and makes most of critical decisions based on their personal expertise. So in a small business, the CEO is largely responsible for the company performance by either criteria. I don't think that either is particularly true for larger corporations.

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Samprimary
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Meg Whitman was used quite honestly as our last class example of dysfunctional incentives in and rewards towards holders of top-level positions like CEO's. She's an excellent example of someone who, as the quote goes regarding Meg in some of the more hit-piece commentary on her business career, "failed her way to the top."
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Rakeesh
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quote:
Meg Whitman was used quite honestly as our last class example of dysfunctional incentives in and rewards towards holders of top-level positions like CEO's. She's an excellent example of someone who, as the quote goes regarding Meg in some of the more hit-piece commentary on her business career, "failed her way to the top."
Hit-piece commentary notwithstanding, it sounds to this layman like fugu has made some pretty compelling statements as to why Whitman shouldn't be considered to have 'failed her way to the top'. It takes a pretty specific point of view to say of someone who leaves a company (for example) substantially better than they found it that they're just a failure.

Perhaps she would have been a failure if she kept going in a given job, but that's an entirely different discussion.

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The Rabbit
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fugu13, Your arguments seemed to be founded on the idea that if the market forces are working, that if CEOs weren't worth what they are paid, they wouldn't be being paid so much. But as best I can tell, the evidence doesn't support that position at all. Companies with "credentialed" CEOs don't outperform other companies. For example, corporations with Harvard MBAs as CEOs significantly underperformed companies whos CEOs held no advanced degrees.

From what I've seen, the escalation of CEO salaries is a result of companies competing to draw a "successful" executive from some other company rather than promoting from within. In my admittedly limited experience, that strategy leads to catastrophic failure far more often than soaring success, particularly for technology companies. The proliferation of MBA CEOs with no real appreciation for their companies core expertise is one of the major problems with the US economy.

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TomDavidson
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quote:
Of course rewards scale with things other than risk. They also scale with required expertise and level of responsibility, for instance, two things that are very high for a CEO of a large company.
And yet punishments do not scale? Why not?
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Samprimary
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quote:
Originally posted by Rakeesh:
Hit-piece commentary notwithstanding, it sounds to this layman like fugu has made some pretty compelling statements as to why Whitman shouldn't be considered to have 'failed her way to the top'. It takes a pretty specific point of view to say of someone who leaves a company (for example) substantially better than they found it that they're just a failure.

Perhaps she would have been a failure if she kept going in a given job, but that's an entirely different discussion.

I guess Whitman's big deal now is her politician-dom, but I always will know her as that clown that bought skype (but not any of the associated technologies that run skype). If I'm lucky, there's a surviving thread mucking about where me and some other guys were talking about it because it made practically no sense, what she was doing. Later on, when HP was the subject, we discussed that how between carly fiorina, mark hurd, leo apotheker, and meg whitman, it was like HP had a desire to die under a parading succession of terrible CEO's. About the best you could say for her is that she could at least be counted as an improvement by HP's standard, but that's .. not saying much.

As for how well she treated eBay, by the bottom-line measure of growing net income (conveniently during the part of the company's life where it went public) .. she did fine! And this probably misses all the reasons why ebay couldn't have been happier to get rid of her.

Anyway, it's just an aside, because, yeah.

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fugu13
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quote:
You've already agreed that the latter isn't true. Is there any reason to believe that the former is true? I would expect that the larger the corporation, the less difference the CEO actually makes, particularly in the short run. In larger companies, I would expect a much larger of fraction of the decisions are made at lower levels and that the CEO would be far more dependent on analysis and advice from staff.
Big company CEOs still make the big decisions that risk substantial parts of the company, such as moving completely out of hardware production into all services (what HP is doing right now). Making decisions that involve more money is a pretty obvious definition of more responsibility.

quote:
In a small business, the CEO usually owns a major portion of the business and makes most of critical decisions based on their personal expertise. So in a small business, the CEO is largely responsible for the company performance by either criteria. I don't think that either is particularly true for larger corporations.
Interestingly, substantial parts of the wealth of CEOs of large companies tend to be tied up in the stock of that company due to stock options and the like -- that was certainly the case for Meg Whitman, for instance. That doesn't mean they're risking destitution, but you can hardly say they have nothing on the line.

quote:
fugu13, Your arguments seemed to be founded on the idea that if the market forces are working, that if CEOs weren't worth what they are paid, they wouldn't be being paid so much. But as best I can tell, the evidence doesn't support that position at all. Companies with "credentialed" CEOs don't outperform other companies. For example, corporations with Harvard MBAs as CEOs significantly underperformed companies whos CEOs held no advanced degrees.
You should think through how selection bias applies to that question for a second. I know you know enough stats to understand the point. Studies routinely do find a small correlation for small differences in various measures of scale between the CEOs of publicly held companies. A small correlation that explains far more of a difference in company value than the entire salary of the CEOs (and this is among CEOs who are presumably all fairly good, so compared to a mediocre or bad CEO, the value explained is large).

quote:
And yet punishments do not scale? Why not?
Because there's no reason for them to be. They don't scale for anyone else, but you're saying they somehow suddenly need to scale at the very top. You're the one calling down hellfire, you justify it.
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fugu13
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quote:
As for how well she treated eBay, by the bottom-line measure of growing net income (conveniently during the part of the company's life where it went public) .. she did fine! And this probably misses all the reasons why ebay couldn't have been happier to get rid of her.
While I'm entirely content to agree she has some serious flaws, you have to be pretty darn skilled to take a small company through the dot com crash and into multi billion dollars territory from under five million dollars in revenue. Things like the acquisition of Paypal were very good ideas (and since Paypal is a large part of eBay's potential growth opportunities right now, looking even better in hindsight). I'm not so sure that just any medium competent CEO could have done the same thing she did -- after all, there were an awful lot of CEOs of companies of similar size who didn't even survive the crash, much less make their companies one of the largest few tech companies in existence.
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Mucus
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quote:
Originally posted by DarkKnight:
How would you make them suffer? If the large company fails, do we raid the CEO's home, seize all of their assets, and blacklist them from ever working again?

One proposal:
quote:
Buffett told the Financial Crisis Inquiry Commission in May that top executives must be held responsible for the performance of companies that falter.

“You need a person at the top who has all the downside that somebody has that loses their job working at an auto factory,” he said in an interview released by the panel in February. If a company fails, management should “give back five times the highest compensation they received in the previous five years.”

http://www.bloomberg.com/news/2011-03-11/buffett-retains-his-100-000-berkshire-salary-after-faulting-pay-excesses.html

And some elaboration
quote:
Too often, executive compensation in the U.S. is ridiculously out of line with performance. That
won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay.
The upshot is that a mediocre-or-worse CEO – aided by his handpicked VP of human relations and a
consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo – all too often receives gobs
of money from an ill-designed compensation arrangement.

...

Getting fired can produce a particularly bountiful payday for a CEO. Indeed, he can “earn” more
in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning
toilets. Forget the old maxim about nothing succeeding like success:
Today, in the executive suite, the all too-prevalent rule is that nothing succeeds like failure.

Huge severance payments, lavish perks and outsized payments for ho-hum performance often
occur because comp committees have become slaves to comparative data. The drill is simple: Three or so
directors – not chosen by chance – are bombarded for a few hours before a board meeting with pay
statistics that perpetually ratchet upwards. Additionally, the committee is told about new perks that other
managers are receiving. In this manner, outlandish “goodies” are showered upon CEOs simply because of
a corporate version of the argument we all used when children: “But, Mom, all the other kids have one.”
When comp committees follow this “logic,” yesterday’s most egregious excess becomes today’s baseline.
Comp committees should adopt the attitude of Hank Greenberg, the Detroit slugger and a boyhood
hero of mine. Hank’s son, Steve, at one time was a player’s agent. Representing an outfielder in
negotiations with a major league club, Steve sounded out his dad about the size of the signing bonus he
should ask for. Hank, a true pay-for-performance guy, got straight to the point, “What did he hit last year?”
When Steve answered “.246,” Hank’s comeback was immediate: “Ask for a uniform.”
(Let me pause for a brief confession: In criticizing comp committee behavior, I don’t speak as a
true insider. Though I have served as a director of twenty public companies, only one CEO has put me on
his comp committee. Hmmmm . . .)

http://www.berkshirehathaway.com/letters/2005ltr.pdf

It's worth noting I think, that excessive CEO compensation is damaging not only to the gini index, but also to shareholders (who can include anyone from Buffet to your average Joe holder of a mutual fund/pension plan).

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TomDavidson
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quote:
I always will know her as that clown that bought skype (but not any of the associated technologies that run skype).
I first encountered her when she destroyed the careers of a few of my friends by betting heavily on Pokemon, back in the late '90s.

quote:
Because there's no reason for them to be. They don't scale for anyone else, but you're saying they somehow suddenly need to scale at the very top. You're the one calling down hellfire, you justify it.
What makes you think they don't scale for anyone else? As an assembly-line worker, if your mistake destroys an assembly line, you don't think that'll come up? I think they do scale, but not with size.

quote:
you have to be pretty darn skilled to take a small company through the dot com crash and into multi billion dollars territory from under five million dollars in revenue
You keep speaking as if Whitman were somehow instrumental in growing eBay. Do you believe it would not have happened had she not come in well after the company became successful?

[ October 24, 2011, 05:35 PM: Message edited by: TomDavidson ]

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Destineer
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quote:
You only see a 1:1 correlation (linear means something else) in pay increases in the *very* largest companies.
Ha ha, oops. [Razz] Yes, I know what linear means.

quote:
In most companies (including those, once you take into account the original salaries) you see that a company that increases in size by 10% has about a 3% increase in CEO pay. That seems to be higher at the top end, but most of the models only fit linear relationships to the overall sample (easier to be confident of the math). In particular, there's a lot more competition in the US for CEOs at the top end: keep in mind that even the tiniest percent difference in company value caused by a CEO will almost certainly amount to tens of millions, and probably hundreds of millions to billions of dollars. Then look at the CEO salaries of the top 400 companies.
You're making it sound like the CEOs of large US companies do in fact make more than you would expect extrapolating from the pay of small-time CEOs. Is there some reason that's not the right way to read the fact that (it sounds like) the slope of a graph of CEO pay vs. size goes up considerably for the largest companies (which are, as you say, mostly American)? Just because there's so much money at stake with every percent increase? I guess I don't find that point so convincing.
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Mucus
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quote:
Originally posted by The Rabbit:
... From what I've seen, the escalation of CEO salaries is a result of companies competing to draw a "successful" executive from some other company rather than promoting from within.

On this note:
quote:
Schumpeter at The Economist pointed me to a paper by Richard Cazier and John McInnis on one of my favorite topics: CEO hiring. Cazier and McInnis first confirm, not surprisingly, that pay for new, externally-hired CEOs is positively related to the past performance of their previous firms. In particular, they measure EXCESS_COMP as the difference between actual first-year compensation and the compensation that you would predict just based on the characteristics of the hiring firm; EXCESS_COMP turns out to be positively associated with the CEOs’ prior firms’ stock returns. That makes sense, since you would think that people from successful companies would be able to command a higher price than people from less successful companies, and it isn’t obviously controversial, since you would think they would deserve it.

But what do the new firms get for this pay premium? It turns out that their future performance, measured in terms of return on assets and operating return on assets, is negatively associated with excess compensation based on prior performance.* In other words, people from successful companies don’t deserve the pay premium because the higher the premium they are able to command, the less well they are likely to do.
...
In the end, you get something vaguely like the Peter Principle: the more successful Company A is, the more market power its CEO has, and the more likely she is to be overpaid to be CEO of a company she is not qualified to lead.

http://baselinescenario.com/2011/10/16/the-more-you-pay-the-less-you-get/
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fugu13
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quote:
What makes you think they don't scale for anyone else? As an assembly-line worker, if your mistake destroys an assembly line, you don't think that'll come up? I think they do scale, but not with size.
They don't scale for anyone else's degree of compensation (though the causation does go in the other direction: people engaged in riskier jobs do receive higher compensation). Of course consequences scale with the degree of the mixup.

quote:
You're making it sound like the CEOs of large US companies do in fact make more than you would expect extrapolating from the pay of small-time CEOs. Is there some reason that's not the right way to read the fact that (it sounds like) the slope of a graph of CEO pay vs. size goes up considerably for the largest companies (which are, as you say, mostly American)? Just because there's so much money at stake with every percent increase? I guess I don't find that point so convincing.
I'm not trying to say US CEO compensation is perfect. I'm just saying those really big outsized sounding numbers are almost entirely possible to explain by company size and profits scaling up. They mean you can't say US CEOs are obscenely compensated compared to European ones, because adjusting for the size of the company, they aren't. Ditto, the ratios between lowlevel worker pay and CEO pay aren't outrageous compared to European ones, because European companies tend to be smaller and less profitable. The largest companies in the US very possibly do pay somewhat outsized amounts, but I'm hardly going to get super upset about it; we're talking between all of them maybe one or two hundred million dollars, which just isn't that big a problem considering the scale of the problems in our economy.


quote:
You keep speaking as if Whitman were somehow instrumental in growing eBay. Do you believe it would not have happened had she not come in well after the company became successful?
Do I think she had something to do with the company she was in charge of growing around two thousand times larger? Yeah, I do. And she was widely regarded as instrumental in it by those in and outside of eBay during most of that period.

Mucus: Buffett's proposal is a very bad idea, but that isn't surprising, he's made it clear that he's mostly throwing out his recent sound bites for political reasons. There's a pretty simple reason it's a bad idea, though: when a company starts doing badly, it frequently gets rid of the parts of the management team perceived as problems, then hires new management to attempt to turn the company back around. If Buffett's plan were enacted, nobody would ever want to come into a company in trouble in an effort to turn it around. And anyone who felt a company might fail within the next few years would abandon ship like crazy (pretty much ensuring it would fail).

Regarding the study, yep, boards probably are generally paying too much attention to past CEO performance. Of course, that entirely undermines the argument that boards *aren't* using CEO performance to set pay (not that there weren't lots of studies already showing that). Note that the study didn't find (as far as I can tell from the abstract, but they'd have mentioned this) that CEOs with better previous performances didn't create better performance at the new firm, just that the size of the increase in salary based on prior performance was negatively correlated with the change in performance at the new firm, which isn't the same thing.

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fugu13
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Since we're on the subject of HP CEOs, Fiorina's a good example of someone who has been subject to consequences. She went from millions of dollars a year in salary and benefits to maybe a couple of hundred grand (total) from being on a few boards of directors of smaller companies she has some connections that might help for, and she'll probably never be an executive officer again. Heck, she's probably earning more in interest on her investments than she is in salary.

Not destitution by any means, but not zero consequences, to lose around 90% of her compensation (probably permanently) and her career path. Even with her golden parachute, she lost a huge amount of future earnings (75% or above, I guesstimate) when she made those missteps she made with HP. I don't think you'll find many jobs where people can lose that percentage of their future earnings even when they make a pretty big misstep at work.

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The Rabbit
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quote:
I'm not so sure that just any medium competent CEO could have done the same thing she did -- after all, there were an awful lot of CEOs of companies of similar size who didn't even survive the crash, much less make their companies one of the largest few tech companies in existence.
It can be very difficult at times to tell the difference between skill and luck.

Unlike nearly all the companies that went under in the dot com bubble, e-bay was actually profitable before it hired Whitman and went public. Most of the companies that didn't survive, didn't survive because their business model was fundamentally flawed and not because they were poorly managed.

E-bay's original business model was sound. It filled an unfilled niche'. Its operating costs were very low enabling it to maintain a huge profit margin while charging fees most sellers found reasonable. With that base, reasonable competence was all that was really needed to build a successful company.

Nothing Whitman did was particularly visionary. You tout the purchase of Paypal, but when it happened most e-bay sales were already going through Paypal and e-bay's own payment service was laying an egg. It was a very obvious move. This was a classic of Harvard MBA management. Why develop expertise yourself, when you can just buy a smaller company that's got it.

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fugu13
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quote:
E-bay's original business model was sound. It filled an unfilled niche'. Its operating costs were very low enabling it to maintain a huge profit margin while charging fees most sellers found reasonable. With that base, reasonable competence was all that was really needed to build a successful company.
I've only argued she is, as CEOs go, somewhat above medium competence. You'll hardly see me singing her praises as one of the best examples of CEOs out there. Of course, she was repeatedly awarded for being a good CEO during most of her tenure, so apparently a number of people thought she was. I also never said she was particularly visionary, but it takes more than just a sound business model to grow to a multi billion dollar company.

quote:
This was a classic of Harvard MBA management. Why develop expertise yourself, when you can just buy a smaller company that's got it.
Buying companies with existing expertise is classic management, period. And since ebay did try to develop a paypal competitor (unsuccessfully) before giving in and buying paypal, the aside isn't even right.
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Destineer
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quote:
The largest companies in the US very possibly do pay somewhat outsized amounts, but I'm hardly going to get super upset about it; we're talking between all of them maybe one or two hundred million dollars, which just isn't that big a problem considering the scale of the problems in our economy.
I definitely agree with you there.
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Samprimary
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quote:
Originally posted by fugu13:
Of course, she was repeatedly awarded for being a good CEO during most of her tenure, so apparently a number of people thought she was.

Most horrid CEO's can point to repeat awards for performance. Jill Barad had a wall of 'em.
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TomDavidson
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quote:
The largest companies in the US very possibly do pay somewhat outsized amounts, but I'm hardly going to get super upset about it...
I wouldn't be upset about it if I didn't believe that it contributes to a culture of entitlement among executives.
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Mucus
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quote:
Originally posted by fugu13:
Mucus: Buffett's proposal is a very bad idea, but that isn't surprising, he's made it clear that he's mostly throwing out his recent sound bites for political reasons.

It's worth pointing out that while the Bloomberg interview is from March of this year, the reasoning is from 2005 and is inside a letter to shareholders. That of course doesn't rule out that he made the comment based on political reasoning, but I don't think its clear since much of the reasoning is from the standpoint of high CEO pay being a bad investment.

quote:
If Buffett's plan were enacted, nobody would ever want to come into a company in trouble in an effort to turn it around.
"Nobody"? Not even an unemployed auto-worker or a recent college graduate? "Nobody" is obviously an exaggeration or at least I hope it is since it should be clear that many people would take such an offer, just not necessarily the current people that want to be a CEO, but I think that's by Buffett's design.

It's way better than a lottery ticket, I think. You run the risk of having to pay back the base salary (or simply going bankrupt), but for five years you get to enjoy the perks of being a CEO. That could be a good deal for *someone* on the healthcare benefits alone. That's the downside, but the upside, if you manage to turn the company around could be stock options paying off to the tune of billions of dollars.

Or in his words
quote:
I think there should be significant downside to them. I’ve suggested to them that maybe they give back five times the highest compensation they received in the previous five years or something. It has to be meaningful but it can’t be so Draconian that you don’t get Directors. You’ll get CEOs, you don’t have to worry about that, if you’ve got a lot of upside for CEOs you can give them the downside of, you know, sack cloth and ashes and you’ll still get CEOs that--

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