
Paul Krugman and the “Monday Night Football” Theory of CEO Pay - jkestner
http://www.vox.com/2015/5/18/8619687/paul-krugman-ceo-pay
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adventured
This is an exceptionally poor premise. It's hard to believe the writer of this
article missed the obvious.

That CEO pay chart tracks the value of options granted.

What it almost perfectly aligns to is the S&P 500 chart.

Here, I did a crude overlay, it's blatantly obvious.

[http://i.imgur.com/S2hN29F.png](http://i.imgur.com/S2hN29F.png)

It wasn't Monday Night Football or any other ridiculous notion. It was the
greatest stock market boom in the US since the roaring 1920s, which sent the
value of options soaring.

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criley2
"What it almost perfectly aligns to is the S&P 500 chart."

You've displayed correlation and insisted causation. Of course, Ezra seems to
have done so as well, but your correlation isn't any more impressive than his.

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adventured
The fact that it so closely aligns, in both spikes and drops, over a 50 year
period of time, more than proves the point.

I'm insisting that such an extreme coincidence is impossible.

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Phlarp
It seems to decouple quite noticeably around 2008.

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notahacker
The decoupling in 2008 is plausibly explained by increased pressures for pay
restraint following the financial crisis.

~~~
Phlarp
I agree, but now we're back to confusing correlation with causation.

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kvcc01
In the typical case, CEO pay is determined by the compensation committee of
the board of directors. The comp committee, in turn, hires a compensation
consultant, who presents the board a study of how much other CEOs of similarly
sized companies in the same industry get paid. Since no board wants their CEO
to be paid "below average", they'll generally vote for a raise to bring it at
least to the prevailing average. But since all boards are behaving similarly,
the prevailing average ratchets up in each cycle.

This ratcheting theory is straight from Warren Buffett's annual letters, and
it's a good illustration of the results of perverse incentives, considering
that board members are often nominated by the CEO so there's peer pressure to
"play nice" and not to antagonize the CEO.

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mzzk
It's not strictly the board's fault. The CEO market demands high salaries. Few
worthwhile CEOs will accept a position at less than market value.

~~~
contravert
I always found the free market argument hard to believe.

Why is it you can hire a world-class nuclear physicist or neurosurgeon for
less than a percent of what a CEO is paid?

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lordnacho
I happen to agree. What's he's saying is more of a null hypothesis than an
attempt at explanation. Because he doesn't actually quantify the social norms
thing, it feels like a catchall for "nothing specific in terms of
supply/demand".

If you look at supply, in any company there's a bunch of juniors who could
(and often do) step up to the top job. There's no reason to think that
companies suddenly suffered a drought of CEO candidates. Are there more
companies that need a CEO? Maybe, but it's hard to see it explaining a
20-to-300 increase in salary ratio. Is it because competition gets tougher, so
you need the best CEO? Maybe, but profits are also rocketing during that time,
suggesting it wasn't so hard to make money after all.

If you look at how the S&P performed, it looks like there's a correlation, so
probably some of it is due to option grants and such. But we're still trying
to explain a huge gap.

One important thing he mentions is the scope: the Anglosphere. In fact, it's
true that CEO pay is more restrained where people don't exchange as many ideas
with the Anglos.

If I were to point at one thing that is in common with football, it's star
worship. CEOs these days are not just professionals putting in a good shift,
they're gods doing the impossible. And getting paid accordingly.

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bcg1
Ever been in a meeting where there is food at the back of the room but no one
is eating it? But then one person stands up to go get a donut an then everyone
realizes it is ok and follows suit.

According the Ezra Klein, that it the reason CEO vs. worker pay has increased
since the mid 90's. Helped, according to him, by Reagan tax cuts. I beg to
differ on his reasoning.

1) While the moves are more erratic in the last 20 years, the degree of change
is no that different... from 1975-1995 it was around +300%; from 1995-2015 is
was around +300%... suggesting that the trend goes back further than his
article accounts for with respect to the Reagan tax cuts.

2) Klein's argument is quite specious in my view... stating "it just wasn't
done" without supporting evidence just doesn't cut it.

One could just as easily argue that this "phenomenon" is correlated to the
Clinton administration's repeal of the Glass-Steagal Act, or the Nixon
administration's unilateral renege on the Bretton-Woods arrangement through
the closing of the Fed's gold window. In any case, it is unfortunate that a
talented writer and researcher like Ezra Klein spends his talents shilling to
support a political narrative. I'm not a republican or democrat, just someone
who wants to read good and truthful information.

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jadell
There are several possible triggers. A popular hypothesis is that in the early
1990s, the SEC began requiring the disclosure and reporting of executive
compensation. The prevailing theory was that it would shine some light on the
discrepancies between executive and normal workers' pay and force executive
compensation down through public shaming. Instead, it did the opposite:
executives started comparing their own salaries, and shopping around for the
best compensation. Boards, on the other hand, started increasing executive
compensation to make it look like they were recruiting only top most valuable
talent. It became a positive feedback status-based market for executive
compensation.

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bcheung
Krugman says nothing happened in the 1990s.

I say the Internet happened.

I also don't buy the argument that it is just social norms because income
inequality is more of a social speaking point now that it was back then and
yet salaries continue to rise.

The graph seems to correlate with the rise of the Internet and the dot com
crash fairly well. It also seems to correlate with monetary expansion, how
well the economy was doing at the time, and the real estate markets. Not
saying that is the reason but it seems a much better explanation than "society
allowed it".

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dkokelley
I think what the author is getting at here is that CEO pay was in an unstable
equilibrium, and that starting in the mid-90's, that balance was tipped,
causing "run-away" CEO pay.

I don't particularly agree with this conclusion, but the "unstable
equilibrium" hypothesis is what is implied. "The conditions were always there,
but some instigator (MNF) triggered the change."

I personally think _adventured 's_ hypothesis regarding stock market
performance has a bit more merit.

~~~
aetherson
Klein's thesis is actually that the conditions weren't always there, they were
that the conditions were set up by the Reagan tax cuts, but there was about a
10 year delay between the conditions being set up and the trigger.

Specifically, he argues that pre-Reagan, it wasn't worthwhile for CEOs to
bother to try to get higher pay, because the high tax rates meant it mostly
went to the government.

I do wonder whether Klein also feels that, say, higher capital gains taxes
would mean falling investment because investors wouldn't bother chasing
returns if the majority of them went to the government.

I also find it unimpressive for Klein to talk about 90% top marginal tax rates
and then say that Reagan slashed tax rates. Just to be clear, 90% marginal
taxes: 1951-1964. Reagan tax cuts: 1981. Between there: 70% marginal taxes.
Does tripling the take-home pay of top earners (from 10% of nominal salary to
30%) not provoke any changes?

Finally, what's the word for "post hoc ergo propter hoc," except even lamer
because it's not just post hoc it's way way way post hoc? Like, if I don't
like 1916's establishment of National Parks, can I claim that they are
responsible for overgrazing in the 1980s and it just took a while for norms to
be overcome?

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brandonmenc
> CEOs appoint the committees that decide how much they’re worth

Correct me if I'm wrong, but this isn't true unless the CEO has significant
voting power as a shareholder. Right?

~~~
wstrange
Boards often select the management consultants that evaluate CEO pay, and it's
a pretty tight and friendly circle in the industry.

The consultants want to get the next gig - and what better way than to give
the board (and the CEO) a tidy bonus.

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panarky
So in the 1970s, CEOs were compensated at about 20 times the average worker's
compensation.

In the late 1990s, the ratio zoomed up to about 300 times the average worker's
compensation, where it remains today.

What can explain this? Why have average inflation-adjusted wages stagnated or
declined, while compensation for top people goes up by an order of magnitude
or more?

Globalization? Decline of organized labor? Private equity? Financial
engineering?

~~~
stephengillie
The article claims it's a change in social norms - nobody paid CEOs that much.
Until, one day, someone did. From there, it was all just CEO perception and
FOMO.

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danbruc
How would you argue that a CEO deserves a higher pay than a worker in the same
company working the same number of hours? I would go as far as claiming that a
worker should sometimes be payed better than the CEO, for example a mine
worker doing the hard work and risking his health vs the CEO of the mine
pushing papers in an air-conditioned office. So what are good arguments in
favor of high pays for CEOs?

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brandonmenc
> what are good arguments in favor of high pays for CEO

The mine worker is never going to make decisions that generate billions of
dollars of revenue. That's one argument.

Another is that the pool of potential CEOs is small.

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danbruc
The CEO can make decisions all day long, without miners they will not lead to
a single Dollar of revenue. Not sure about the rarity of possible CEOs, it
seems at least not absolutely obvious that there are many less possible mining
company CEOs than possible miners (normalized by the number required).

~~~
brandonmenc
> The CEO can make decisions all day long, without miners they will not lead
> to a single Dollar of revenue.

Yeah, and the miners can do their job in an unprofitable way until the CEO
tells them to do it differently. It's a two-way street.

This idea that the executives are dependent on the workers but not vice versa
doesn't reflect reality.

~~~
danbruc
I didn't want to imply that the dependency is only one way, just wanted to
respond to CEOs having exceptional powers. But this two dependency seems even
more support that the difference in pay are not easily justified.

