
The growing size of firms may help to explain rising inequality - sebgr
http://www.economist.com/news/finance-and-economics/21646266-growing-size-firms-may-help-explain-rising-inequality-bigger
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zeidrich
I think this makes a lot of simple sense.

Say you are a service company.

You have 20 employees, and one manager. The manager makes twice as much as the
employees, because customarily managers make more than their subordinates.

In a small business, the manager is the owner, and his salary is twice as much
as the average worker.

Now say you are a bigger business, and you have multiple outlets in the
region. Your regional manager manages 20 outlet managers, the 20 managers each
manage 20 employees. Your regional manager makes twice as much as the outlet
managers because managers make more than their subordinates.

Now say you are a national business, and you have 20 regions each with 20
outlets per region. Your national manager manages 20 regional managers. Your
national manager gets paid twice as much as the regional managers.

And say you're an international business, and you have a presence in 20
countries each with multiple regions with multiple outlets. You manage all of
the national managers, and so you get paid twice as much as them.

The small business has a situation where the business owner makes twice as
much as the employees.

The international business has a situation where the top of the management
chain makes 32 times as much as the employees.

That's using a really simplified model, but the larger the business, the more
layers of management will likely exist, and we have a system where management
expects to get proportionally more money than those they manage. That's
discounting any human or sociological factors that might contribute.

I think the biggest change that could correct this issue would be to do away
with the idea that your boss makes more money that you is just a given.

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notahacker
With public companies it's more a case of what a remuneration committee -
itself composed of multimillionaires - has to take all this into account when
approving the salary package when their preferred candidate for CEO has
requested an additional $X million

If the less preferred CEO candidate is marginally less efficient in maximising
profit it costs the firm $XX million. A botched acquisition costs $XX-XXX
million. Misguided strategic changes could cost $Xbillion over the next few
years and be irreversible. If the markets disapprove of the less-preferred CEO
candidate their appointment might even wipe $XX million off the share price
overnight, before they've even had a chance to act.

How much the lower echelons of staff able only to affect the performance of
their own department earn doesn't even enter the calculus, except perhaps to
note that the new CEO can certainly justify $X million more if he's really
good about identifying which areas those staff need to be cut.

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littletimmy
There is one piece of received wisdom in this article which is particularly
problematic: "But managing a multinational firm such as Walmart requires a
different—and much rarer—set of skills than that required to run a corner
store."

This is simply not true. Executive skill is very highly overrated. There is no
"magic" these overpaid executives have that uniquely enables them to run large
companies. This received wisdom probably comes from the efficient-market
hypothesis, in the sense that if executives are paid so highly it must be that
there skills are amazing and valuable. This need not be true. It may very well
be due to a mix of cronyism, posturing, and self-promotion.

Let's end this nonsense of executives being the crème de la crème of
intellectual superiority.

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pdeuchler
Oh please, everyone thinks they could do a better job until they actually end
up on top.

90% of being a leader isn't necessarily having a specific skill or specific
domain knowledge, it's about having the courage to make unpopular decisions,
dealing with the fallout alone, and leading by example when the going gets
tough.

~~~
eli_gottlieb
>90% of being a leader isn't necessarily having a specific skill or specific
domain knowledge

So you're saying there's a broad class of people who can do the job well
rather than a tiny clique?

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pdeuchler
You didn't read the second half of that sentence, did you?

~~~
s73v3r
In many cases, the second half of the sentence never really happens.

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stolio
Well. If the average size of firms has gone up so has market concentration.
Market concentration brings market power, market power brings arrangements
that favor those who hold that power.

In general, markets with low concentration are defined by competition while
markets with high concentration are defined by power. For measures of
concentration see the HHI or the concentration ratios.

[0] -
[http://en.wikipedia.org/wiki/Herfindahl_index](http://en.wikipedia.org/wiki/Herfindahl_index)
[1] -
[http://en.wikipedia.org/wiki/Concentration_ratio](http://en.wikipedia.org/wiki/Concentration_ratio)

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PaulHoule
I've wondered if 401k plans and IRAs have held back small businesses because
people could have spent the money to start their own businesses; it is
horribly difficult to beat an S&P 500 index fund, but the popularity of those
funds mean a lot of people are spraying money at them.

~~~
maxerickson
Do you think they've displaced a significant amount of savings?

(They've displaced things like pension programs, but those are even less
flexible)

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bcg1
The hidden fees of 401k plans have been displaced to Wall St firms unbeknownst
to most participants because they don't show up on statements, and because the
balance that people see on their statements give an inflated sense of how much
they have saved, even though they still need to pay taxes when they withdraw.

It also diverts money away from more conservative long term investments in
tangible wealth like real estate and into the stock market, so people are less
diversified and lose out when the markets go down. 401k's really only let you
take long positions, while financial firms can take either side of the
trade... you can reason out who the winner will be in that situation.

~~~
Consultant32452
Those things aren't significantly different compared to pensions. In a pension
your pension fund will be paying wall street fees. You have even less control
to be able to do things like invest in real estate with a pension. At least in
a 401k plan you can potentially invest in mutual funds that are proxies for
real estate.

I have an IRA through my employer (which happens to be my own company, but
that's irrelevant). I can bet against the market via ETFs if I want in my IRA.
Your employer just chooses a plan for you with crap flexibility.

I think the biggest change has really been the social acceptance of massive
consumer debt. I cringe so hard every time I hear someone say something like,
"I paid down my credit card a bit so I could buy that new XBox." People didn't
used to live that way and the removal of pensions had nothing to do with that.
I would still put a lot of blame on Wall Street there, but not because of fees
on retirement plans.

~~~
bcg1
I agree with you... my statements were actually specifically about 401k's, and
whether or not they contribute to capital misallocation. Almost all 401k plans
are much more restrictive than IRA accounts. Personally I think that a self-
directed IRA is a fantastic vehicle where you can buy actual real estate etc,
but they are so far outside the norm that they almost don't exist when
speaking in generalities.

I also agree about the social acceptance of consumer debt. They say you learn
from your mistakes, and boy have I done a lot of learning. Resolving to get
and stay out of debt is a life changing decision for sure.

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ErikRogneby
I find it enormously ironic that when I went to this link it popped a modal
with a Rolex ad.

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zsombor
Someone from the top 5% is more likely to hold their a wealth in equities,
then the Average Joe from of the 50%. The top percentiles may be paid more,
but they are likely to make far more in the long term on their investments
anyways.

In this sense inequality is unavoidable fact of life. Much the same as some
people are gifted with genes making them more likely winners in a long
distance running contest. Unequal but hardly unfair as long as a fulfilling
life is possible regardless of such deficiencies. The problem should be
phrased in terms of opportunities and social mobility, instead of inequality.

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prawn
I often wonder if the world would be a better or worse place if (somehow)
companies were limited to something like 5,000 employees. Is there a threshold
which allows diversity and efficiency but restricts dominance?

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bcg1
Well duh... is it really a surprise that the consolidation of wealth and the
consolidation of firms owned by the wealthy is correlated? Next you're going
to try to tell me that this is correlated to their undue influence over the
political system...

It is ironic that a publication owned by the Rothschild family is espousing
these views.

