Ghostbear wrote:Would you challenge the idea that most CEO's see a lot of their compensation in the form of stock options (aka, capital)?
I wouldn't challenge the fact, but I would challenge the implication. When talking about production, it doesn't matter if someone is compensation in cash or stock or gold or pickled fish, what matters is what they add to the production process. In many modern corporations, every
employee receives some of their compensation in the form of stock or stock options. That doesn't mean there's only capital involved in their production.
CEOs are paid by the period for the time, not the money, that they invest, and so they're labor. The story of stagnant median real wages and growing top X% wages is not that capital wins and labor loses, because part of labor is
getting significant gains. It's that people whose labor is multiplicative win and the people whose labor is additive stay the same, because as the world grows wealthier multiplication is worth more than addition.
Ghostbear wrote:There are so many links, images, and sources on the previous page- "Figure 9" gives me zero information to determine what I should be looking at. This isn't a textbook.
I apologize for presuming you would be familiar with your own posts. The image is here
Ghostbear wrote:Why are CEO's exempt from this? Would you say that executive compensation was unreasonably low before the late 90s?
No. What changed between the 80s and the 2000s was that firm size shot up, and the compensation for executives is influenced in several ways by firm size. You can read Gabaix's paper about that here
Ghostbear wrote:Uh, I'm definitely not seeing a "clear" positive correlation. Are you looking at the same chart as I am? Even if there is, a "not very strong correlation" is proving the point: you can't predict CEO salary based on CEO performance with any measure of accuracy.
I am looking at the same chart; the correlation is .094. (The chart excludes an outlier which makes the correlation negative, but since we're comparing our abilities to read charts, I excluded it from the analysis.) That implies there is
information stored there, so you can make predictions with some positive accuracy.
But, most importantly, showing that two metrics are only weakly coupled doesn't mean that one of those metrics is flawed. When you look at the what they're actually comparing, it's surprising that the correlation is as high as it is. They compare shareholder return over 2009 (i.e. stock price at 2009 minus stock price at 2008 plus any dividends) to the difference between executive compensation over 2009 and over 2008- but if a company had a great year in 2008 and a good year in 2009, and the CEO is compensated entirely based on shareholder return, it would show a high shareholder return and a declining
CEO compensation, contributing to a negative correlation even through CEO compensation is entirely determined by shareholder return.
Ghostbear wrote:Anyway, your assertion that CEO pay is fair because it's determined by the pricing system seems completely absurd in the face of:
Let me rephrase my earlier statement: it's a well-known and well-discussed problem for shareholders
Price is a negotiated relationship that determines how much of the surplus value from trade goes to which party. So long as both parties get out more than they put in, the trade is a fair one. For trades that should happen, that means there are a range of prices that should be acceptable to both parties, and negotiation determines who gets what share.
Low-friction markets give both parties an opportunity cost- if I am willing to pay $10 for a banana, and you sell them for $5 while your friend sells them for $1, even though I'd be willing to trade with you in the absence of your friend, because your friend is offering a better deal trading with you represents a loss. This constrains the range of acceptable prices, and in perfect markets in equilibrium that price has a range of 0- i.e. it's a single value.
The executive compensation committees and board-stuffing tricks are good for CEOs and bad for shareholders. It's not clear that, overall, they make the gains for bidding for a great CEO negative for shareholders. When they lower friction in the CEO market, they're a good thing for overall efficiency, but when they represent coercion and perverse incentives, they're a bad thing for overall efficiency. I also suspect it's better to encourage large, long-view shareholders to take a more active interest in the CEO selection and compensation process than to restrict the CEO's bargaining tools.
(One of the things to note about CEO compensation- it depends not just on the company that hired them, but the company that might hire them away. That's one of the reasons why Japanese CEOs are compensated so poorly compared to English-speaking CEOs; the labor market is much higher friction and smaller. English and Australian CEOs are compensated more highly than similar CEOs in other countries because they come from the Anglosphere, and thus could (and often are) hired by American companies.)