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.
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.
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.
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).
> 95% of Fortune 500 executives are not people who want intrinsically to run companies; they want the perks.
How about some evidence?
Note that reducing the pay doesn't reduce the status. If status is the only points, who's to say that folks won't continue to play the game?
> Hard jobs should pay more than easier ones, and high-ranking jobs should only be available to those with sufficient experience and knowledge
Who makes the call? Does the facebook kid have sufficient experience and knowledge? Did Bill Gates?
If we reduce pay, that money goes somewhere else. Where and why is that good? (Take pro-athletes as an example. If we limit their salaries, who gets the money?)
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.
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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.
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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.
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.
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.
Armored car drivers do make more than most employees who do cash drops for small biz. "Armored cars" that schlep records are typically driven by folks who make less than those who transport money.
In short, there are at least some situations where the amount of cash handled affects compensation.
Everyone thinks that to be Successful Guy they have to work really hard. Successful Guy takes responsibility for their work and becomes more successful. Everyone works harder since Successful Guy is even further beyond their reach. Successful Guy works even less since everyone else is working even harder. Rinse and repeat. Eventually, Successful Guy appears magical and has the ability to rise to the top of any organization.
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.
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.
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.
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.
> 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.
Not really. This is a myth that marketing schysters try to peddle. A lot of naive people like this view though. These people would have you believe that nothing survives without marketing. When's the last time you saw a commercial for heroin or cocaine? It seems sales are pretty good for those products.
And yet, again, all the marketing in the world couldn't build one bridge. It just inherently cannot. Sorry.
Your argument is that celebrities use drugs? Really? Celebrities also eat food, breath air, and sleep. Maybe you should spend more time evaluating your arguments and less time on OK Magazine. Homeless people, business people, house wives, blue collar workers, people of every walk of life use drugs. Big deal.And the products are all sold without marketing propaganda. How many crack dealers do you really think read Seth Godin? Or "How to Win Friends and Influece?"
What is stupid exactly about my "bridge" argument? What does the "bridge to nowhere" have to do with anything? That is just a Red Herring. All the marketing in the world will never produce any non-trivial feat of engineering. Sorry. Part of the issue is that you and people of your view want to point to marketing for the success of any idea; you have no demarcation criterion.
Of course it is. I say this as I sit in my Herman Miller chair that is truly more comfortable that that wooden one, typing on my Macbook pro that makes me miles more productive than my old pc, while sipping my Starbucks latte that is a much better coffee than what I can make at home.
Oh yeah, and did you hear that new band at SXSW this year? Much better than the one I heard the other day on the radio.
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.
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.
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.
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.
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.
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.
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.
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..
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.
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.
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>
"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).
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.
Everyone thinks that to be Successful Guy they have to work really hard. Successful Guy takes responsibility for their work and becomes more successful. Everyone works harder since Successful Guy is even further beyond their reach. Successful Guy works even less since everyone else is working even harder. Rinse and repeat. Eventually, Successful Guy appears magical and has the ability to rise to the top of any organization.
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.
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.