
The myth of big salaries (it's all marketing) - peter123
http://sethgodin.typepad.com/seths_blog/2009/03/the-myth-of-big-salaries-its-all-marketing.html
======
mdasen
_should the guys who drive an armored car that carries millions of dollars in
bonds get paid more than the guys that drive an armored car that only carries
thousands of dollars in cash? Does the amount of money handled change the
difficult of the work?_

I think this is an interesting aside in the article. Seth seems to be arguing
that it's the same work, but it really isn't. The amount of money handled does
change the difficulty. First, it's going to require more trips to move the
money and that is increased labor. More importantly, the risk goes up the more
money you're transporting. Maybe those changes are small. OK.

The real difference comes in the value to the firm hiring you. If you're being
entrusted with $1M vs $100K, the firm has a greater interest in making sure
you're good at your job. Loosing $1M because you hired a poor driver is worse
than loosing $100K because you hired a poor driver. Likewise, when we're
talking about hiring for a CEO, a firm will want the best since they're
entrusting that person with the livelihood of the firm. His or her job may be
no more difficult than anyone else's job, but the firm has a high interest in
making sure the CEO is competent. An incompetent person in an entry-level
position is unlikely to be in a position to do the damage that an incompetent
CEO could do to the firm.

So, by paying high salaries, firms hope to be able to take their pick of
managers and get the most competent. However, firms have yet to show that they
are able to determine the competent from the incompetent. So, at the moment,
most firms are simply paying high salaries to whomever is good at politicking
and showing themselves in a good light regardless of actual competence.

There is a theory behind it and it's not just marketing. However, the fact
that firms have proven unable to filter the competent from the incompetent
limits the applicability of that theory.

~~~
time_management
_So, by paying high salaries, firms hope to be able to take their pick of
managers and get the most competent. However, firms have yet to show that they
are able to determine the competent from the incompetent. So, at the moment,
most firms are simply paying high salaries to whomever is good at politicking
and showing themselves in a good light regardless of actual competence._

Correct. I would go further and argue that paying stratospheric salaries for
executives actually reduces the quality of people selected. The number of
competitors increases, but the nature of the competition changes dramatically
and therefore the selection process becomes a nasty pile of fail. Short-
sighted narcissists instead of leaders rise. They elevate like people, and so
on, until their worldview completely dominates the corporate sphere.

High-ranking political positions pay a middle-class salary (although the
social access these positions offer corrupt this intention) for a reason:
people who attain them should be those who want the job and to do the work (in
this case, to lead) rather than those seeking the material perks.

~~~
mdasen
Yeah, as the number of applicants increases due to large salaries, the
difficulty to figure out which candidates are good increases.

One area that economists often point this out is in education. Many would like
teachers to be both paid more and held to a higher standard (when being hired)
to get the best teachers. However, as you increase the screening and
competition for teaching jobs, the ones with the most alternative options (who
are likely the best teachers) will seek jobs elsewhere rather than being
subjected to a battery of tests and bureaucracy.

In this case, there aren't as many alternatives since CEO positions are at the
top of the pile. Likewise, political positions come with other desired perks -
namely power and prestige.

Economics in this area is really hard. If you (or anyone) come up with a
better system of screening individuals for positions, the world will be a much
better place. Right now, we typically rely on things like resumes, experience,
interviews, etc. which don't really give a good picture. For example, someone
who worked on impressive thing X might have had a really minor roll in X and
someone else who worked on slightly less impressive Y might have been integral
to Y, but resumes can sometimes deceive on that. However, both of those
candidates can be filtered above someone with no experience. Eh. I really wish
I had a good solution to this - and other rating problems. Yelp is nice, but
just because many people are rating things doesn't make it accurate -
sometimes people get angry over something that isn't the other party's fault
and can take out retribution which skews the ratings.

Interesting to think about though.

~~~
time_management
_Economics in this area is really hard. If you (or anyone) come up with a
better system of screening individuals for positions, the world will be a much
better place. Right now, we typically rely on things like resumes, experience,
interviews, etc. which don't really give a good picture._

There's a solution, but it's radical: a massive push in the direction of
social equality, decoupling one's material well-being and lifestyle (somewhat)
from one's job position. Right now, the perks associated with a corporate
leadership position are so obscene as to create an incentive for the wrong
people not merely to put themselves forward for these positions (which could
be attributed to a benign overestimation of one's skill) but to actively
manipulate the system.

Obviously, society needs to encourage and reward hard work, but the mainstream
corporate approach is seriously broken. Hard jobs should pay more than easier
ones, and high-ranking jobs should only be available to those with sufficient
experience and knowledge, but the concept of a job title as a reward for
previous accomplishments (work for less than you're worth now, maybe be an
overcompensated and famous CEO later) has proven itself to be a practical
disaster, in addition to the model's ethical problems.

The main reward for a high-power job should be the work itself, so that those
who fill the positions are likely to be people who actually want to do the job
(and are likely to be good at it) rather than those who want the salaries and
status. 95% of Fortune 500 executives are not people who want intrinsically to
run companies; they want the perks.

Regarding material rewards, that's a matter of "getting the stakes right"--
not so low as to be insulting (since trivial rewards/costs are less incentive
than intrinsic motivations) but not so high as to encourage people to lie
about their talents, skills, and work ethics (more than they already do, human
nature being what it is).

~~~
mdasen
How would this work? There would still be a huge incentive for firms to offer
higher salaries to get who they wanted to hire.

 _The main reward for a high-power job should be the work itself_

Well, if the work itself is equally rewarding at two firms and one is willing
to pay you 10x as much, why shouldn't you go to that firm? Are you proposing
some sort of law against compensation about a certain point? Limiting all
salaries to $250K per year or something?

 _decoupling one's material well-being and lifestyle (somewhat) from one's job
position_

Does this also include decoupling one's material well-being from one's output?
To be fair, in the next paragraph you address that saying, "Obviously, society
needs to encourage and reward hard work," but who is determining what is hard
work in your system? Is this your personal morality? You've decided that
certain labor is worth more than other labor and think society should use your
values?

 _high-ranking jobs should only be available to those with sufficient
experience and knowledge, but the concept of a job title as a reward for
previous accomplishments has proven itself to be a practical disaster, in
addition to the model's ethical problems._

Other than previous accomplishments, how else can firms screen people? This
isn't just a CEO thing. It's pretty much how all labor works in our system.
You've been here for x years and so should be earning more. You did well on
project y and so you should get a raise. You've shown an aptitude for z so
we're promoting you.

\--

I'm not trying to tear your argument apart. It's just that there's a reason
why "radical" solutions are often not solutions. Often times they might fix
one thing while breaking 10 others. The problem we have here is that we can't
figure out who is good at being a manager (or any sort of employee). You're
arguing for a changed system that doesn't actually address that problem. We
still have no idea who to promote. People will still lie about qualifications
because people want to be the boss for power reasons in addition to monetary
reasons. Would you argue that politicians are such better managers because
they're in it for the position rather than the money? I wouldn't say they're
inherently worse than business leaders, but I wouldn't say they're a better
bunch either.

Likewise, we currently value labor based on market offering. You've suggested
a move to the "hardness" of the job being the basis of compensation. What
makes a job hard? Is computer programming harder than teaching? What about
construction work? It's really subjective.

\--

Clearly there are problems with the system, but you need to address the root
of those problems. How do we accurately measure employee (from the lowest
level to the CEO) output value? How do we screen potential applicants for all
jobs accurately?

This isn't just a problem at the CEO level. I've seen programmers that
couldn't say what a linked list was, but they got past the screening process
and coasted on a salary. Likewise, there are CEOs that are doing great jobs
managing their companies. This isn't merely a CEO problem, but rather a whole
labor problem - it's just more repugnant to us that an incompetent CEO is
getting paid millions when compared to an incompetent low-level worker doing
nothing.

------
biohacker42
Law firms tend to be partnerships, so if partners want to give a new guy a ton
of their own cash, good for them.

Wall street transformed itself from mostly partnerships, where partners
invested their own money along with their customer's money, to corporations
where professionals invest other people's money.

Apart from that, we have the system of deciding compensation for CEOs. The CEO
picks people to sit on a compensation board, and they then recommend/decide
what the CEO should get paid.

Warren Buffet in all his years of being an investor has been asked to sit on a
compensation committee exactly once.

In conclusion, it's the system stupid.

Obviously CEO's salaries are going to go as high as can be in the current
system.

Obviously people investing OTHER people's money are going to take more risk
then people investing their own money.

------
pwk
From the article:

 _Aside: should the guys who drive an armored car that carries millions of
dollars in bonds get paid more than the guys that drive an armored car that
only carries thousands of dollars in cash? Does the amount of money handled
change the difficult of the work?_

The amount of money handled does change the cost of failure. It also changes
the amount of risk the drivers face.

~~~
helveticaman
Agreed. Seth Godin is assuming the only factor that should affect pay is the
difficulty of the work.

~~~
jpwagner
I pay my blind limo-driver a ton...

------
garply
I've noticed that Seth Godin seems to think everything boils down to
marketing. Sometimes it feels like a bit of a stretch.

~~~
sgk284
I don't know... the more business experiences I have the more I realize how
significantly more important marketing is than any other aspect of business.
Same thing with selling yourself. It feels like a stretch, and it's hard to
swallow considering that I'm an engineer through and through, but most data
that I've seen fits that conclusion.

~~~
helveticaman
I have very little business experience, but I would guess this is less the
case with engineers. Nerds care a little more about substance because that's
what their job entails. Meanwhile, business guys care about how one sells
oneself because that's their trade and they enjoy seeing it done well.

~~~
jd
Good marketing gets you hired. Good networking gives you job opportunities
around the globe. Good marketing gets you promotions and bonuses. Good
marketing keeps your group's product from getting the axe.

0 errors, 0 warnings isn't all that important.

~~~
nostrademons
Eventually the fakes get found out. You have to be able to back up your
marketing with something real.

Most good organizations will be suspicious of pure marketing claims unless
they can be backed up with hard evidence. So yeah, they'll interview you based
on that referral, but you still have to ace the interview. They'll hire you
based on the interview, but they'll fire you if you don't perform well on the
job.

~~~
benmathes
> Eventually the fakes get found out. You have to be able to back up your
> marketing with something real.

How long is "eventually"? You only need a handful of years marketing crazy
financial products to walk away with a fortune. The people who get found out
aren't the ones who get hurt.

------
dejb
One good alternative explanation of CEO salaries is by analogue to sports
stars. Most people can see the impact of hiring a standout player for a team.
There may a huge pool of competent players but a team full of mediocre players
will most likely lose. Paying the big bucks for the best players can make
sense. In a free market the amount paid to stars will be close to the
perceived increase in profits that having them will provide. I'm surprised I
haven't heard this argument made.

Of course running a company is a lot less transparent than sports so people
can't really judge if these CEOs where ever talented enough to justify these
wages. Certainly the performance of their 'teams' has lead to doubt of the
value of their talent. The suspicion is of course that instead of a a free
market there is essentially collusion at the top levels of these companies
where all the decision makers vote to pay each other more.

~~~
plinkplonk
I agree about the collusion bit but for another viewpoint

"Measurement alone is not enough. An example of a job with measurement but not
leverage is doing piecework in a sweatshop. Your performance is measured and
you get paid accordingly, but you have no scope for decisions. The only
decision you get to make is how fast you work, and that can probably only
increase your earnings by a factor of two or three.

An example of a job with both measurement and leverage would be lead actor in
a movie. Your performance can be measured in the gross of the movie. And you
have leverage in the sense that your performance can make or break it.

CEOs also have both measurement and leverage. They're measured, in that the
performance of the company is their performance. And they have leverage in
that their decisions set the whole company moving in one direction or another
"

PG in the essay "How to make wealth".

"Measurement and leverage" is a good way to judge if a job is worth being paid
very highly for imo.

------
lpgauth
I really don't agree with this: "After a million dollars or so in salary, the
absolute amount that a person is paid has no real impact on their life." This
might be true for an average person, but "big" CEO's live a certain lifestyle
(especially in big cities) and it's not a cheap one. You'd be surprised to
know how many of them end up with debt even thought they make 10+ millions a
year.

~~~
m_eiman
I'd say that the main problem then isn't the income - it's just that the
person receiving it can't manage his or her own money. It's also funny that
the same person is considered the best person to manage a big corporation...

If people like that are the best available for the job, it's just scary.

~~~
tlb
Oh, no, living the lifestyle you need to live to be a successful investment
banker is incredibly expensive. You really do need a big impressive house (or
penthouse in Manhattan) to impress clients with. You have to stay at the same
resorts where your clients stay. You have to do a thousand little things that
say "money is no object" in order for people to trust you with their money.
Irrational but true.

It probably is rational for them to spend into debt in the early part of their
career to build up credibility.

~~~
m_eiman
If you need this and that to impress your clients, wouldn't it be more
rational if the -company- owned the house and paid for the resort? Then when
they replace their CEO they could continue using the same impressive resources
instead of having the new CEO buy the same stuff once more.

Even the goverment does this - puts new presidents in the same old White House
instead of letting each new one build his own.

~~~
m_eiman
And perhaps even more interesting - who gave money to the clients to spend on
such unproductive things? It's the client's money that pays for everything in
the end, of course.

I'm sure it's human nature to fall for flattery and impressive displays of
wealth, but since most of this money comes from institutions of various kinds
(many of them owned or controlled by governments around the world), there
should be a at least a decent amount of checking what the money is used for.
It's one thing to waste your own money this way, but quite another to waste
other people's (sp?) money.

------
jwb119
So, he basically assumes that Wall Street has settled into an absurd
equilibrium point where any one firm would have a massive incentive to break
with the pack, yet they all refuse to do so because not one person at
Goldman/Morgan/Barclay's etc understands marketing as well as Seth Godin?
Convenient..

~~~
3pt14159
Just because 1000 people want the job and are "qualified" doesn't mean they
would do as good a job. Consider this example:

Company A has 1000 employees that they pay 100 dollars a day, totaling
$100,000. They can hire Joe to be COO for $1000 a day or Zach for $5000 a day.
Based on both mens track record the company estimates that Joe will increase
efficiency 1% while Zach will increase efficiency 10%. Since a 10% increase in
efficiency will likely gross them $10,000 a week and only cost them $5000
(Zach's salary) they hire him instead of Joe.

The same thing happens all over the place. Someone that can make a 10% change
company wide is worth FAR more than someone that can only make a 1% change.

------
stcredzero
There was an issue of _Lone Wolf and Cub_ that mentioned a Japanese aphorism
about this:

    
    
        One bowl of rice, two bowls of rice.  
        One mat, two mats.
    

What it means: No matter how rich you are, you're not going to be able to eat
much more than two bowls of rice and you can't sleep on more than a few tatami
mats at a time.

But I would love the ability to do whatever I wanted, live wherever I wanted,
and have a foundation to save the world.

~~~
stevejalim
Very true, and I reckon the 'foundation to save the world' thing is a pretty
commmon wish. (It's on my list, and on the list of a fair few people I know,
but that could just be the circles I'm in). <naive> Perhaps we should all just
club together (n% of profits from m successful startups) and give the Gates
Foundation a run for its money... </naive>

------
natmaster
"Aside: should the guys who drive an armored car that carries millions of
dollars in bonds get paid more than the guys that drive an armored car that
only carries thousands of dollars in cash? Does the amount of money handled
change the difficult of the work?"

Potentially yes.

I disagree that a person should be paid by the difficulty of their work. Who
decides that? One job might be more difficult to one person than another. I
think programming is pretty easy, and construction work is a lot of effort -
should I get paid less for programming than a construction worker?

So what SHOULD one's pay be based on? The value of their labor - the value
their labor provides. This is very similar to how businesses work, which is
why is it sound from a game theoretic sense. Businesses (typically) charge an
amount that is based on what their product is worth. You buy the item because
it provides more value than the cost of giving them that money. This way, both
the business is incented to charge somewhere around that amount (because they
get value from the sale) and the consumer gets value as well (cost - value to
them).

------
jwb119
This is also a fairly egregious application of Signaling Theory..
<http://en.wikipedia.org/wiki/Signalling_(economics)>

------
time_management
You also need to consider the role of blind, brainless optimism.

People overestimate their chances of making it to the CEO level in large
corporations, unaware of just how much the game is rigged against them,
especially if they didn't inherit a network of connections. Since people--
especially the talented young people who are the workhorses of most
companies-- tend to make career decisions based on future income, this is a
way to inflate peoples' anticipated future income with no intention of
delivering on the promise.

~~~
stcredzero
_inflate peoples' anticipated future income with no intention of delivering on
the promise_

Not only that, but without having made explicit promises in the first place!

------
andrewbadera
Wall Street has generated (perhaps manipulatively) trillions in revenue --
hundreds of percent increase -- since the 70s. Shouldn't firms be paying
salaries and bonuses reflective of the profit generated? Seth doesn't know his
stuff on this one. Fluff piece. Boring.

