Here is Marc Andreeseen's interesting take on why exec compensation maybe high:
Conventional theories of exec compensation being so high either (1) what market can bear or (2) board/mgmt agency problem out of control.
Alternate theory is exec comp so high as insurance policy against catastrophic visible public failure; exec firings can be career ending. From this standpoint, top exec especially at highly visible and controversial public co should demand a lot due to career risk of failure. Particularly since exec blowups at this level not always based on performance; can be lots of political juju, need for fall guy, etc.
Fourth theory, however, my personal favorite—exec comp so high as motivation/prize for best lower-level people to stay at big company. Versus leaving to go to increasingly attractive (1) venture-backed startups or (2) private-equity-backed buyouts. I.e. paying a few people at the top a huge amount of money keeps lots of lower level people on the hook due to enticing future payoff. My guess: exec comp levels go up from here, as end markets get larger, tech & market change happens faster, and jobs get more dangerous.
http://pmarcatweetsasblogposts.tumblr.com/post/73998948125/w...
Or there is the simpler explanation that executive compensation is high because there's nothing to stop executives from looting their companies anymore. The traditional forces that would have restrained them (public shame, strong boards, shareholder conservatism, labor unions, tax consequences, etc.) are all at historically weak levels today, so there's nothing stopping executives from raiding the cookie jar. And each time one of them does, he pushes the compensation level all the other ones feel they have to reach to be "in the game" higher, creating a vicious circle.
Like most things in life, executive compensation is about power. And when one side has all the power, it's not surprising to see them use it to enrich themselves.
Wrong. Board of directors, who are elected by company shareholders, can limit executive pay. They do this constantly. I'm assuming you're very new to this.
However it is far more profitable to increase the executive's pay so that it dwarfs their own obscene compensation. That is extremely common in public companies.
I was just reading "Predictably Irrational" where he speculates that it's because in the early 90's, public companies were forced to make executive compensation public, so executives suddenly knew what others were making and that gave them a huge lever in negotiations. He draws a correlation between the creation of the rule and the sudden rise in executive compensation in the early 90's.
Is correlation causation in this case? Seems like it's worth exploring. I don't know how boards get away with the gigantic exit packages though, except that it's probably because all these C-level execs sit on each others' boards.
As for career-ending, how does this explain things like Robert Nardelli? Personally, the only thing I see ending an exec's career is prison.
> Alternate theory is exec comp so high as insurance policy against catastrophic visible public failure; exec firings can be career ending.
Sweet. Now show me where is the insurance against career-ending events (as in: being fired and not being able to find equivalent work again) for rank-and-file engineers.
What do you say? "No such thing?" Yeah, that's my point, precisely.
Here's my theory on it. The main problem is that companies only use one method for determining pay: comps. That's it. They just look around at peer companies and pick a number that's average or higher. It's a perpetual arms race with things only moving in one direction. One guy gets a raise? Effectively everyone does, too, because the median/mean just went up. After 30 years, the compounding effect of this becomes unimaginable.
But that's only half the problem, the other half is that using comps with respect the executive pay is boundless in practice. Think of it compared to housing prices. Home prices rely heavily on comps to help determine the market, but real prices can only go so high because there's only so much debt burden buyers can accept. Prices are effectively capped (in the short-run) by income. This is not the case with companies, particularly bigger, stable companies that are more-or-less on autopilot. Technically, the "market can bear" paying the management billions since these companies are large and profitable. It's just a skimming operation.
What we have now is people, oftentimes interchangeable and generic people (and sometimes even downright morons) making unspendable fortunes for simply showing up to work. Someone else built this thing. Other investors provided the capital. And somehow, you get Fuck-You money. There's no incentive alignment anymore.
Wouldn't the fourth theory only make sense if companies routinely hired executives internally? In the old model of "assembly-line worker eventually works his way up to Ford CEO" I could see high compensation at the top being used as a kind of carrot to keep people motivated about climbing the internal career ladder, instead of jumping elsewhere. But afaict most companies nowadays don't hire execs from internal candidates. The COO in question here, for example, was not a Yahoo employee prior to being brought in as COO (he was hired away from Google, not promoted from within Yahoo).
Conventional theories of exec compensation being so high either (1) what market can bear or (2) board/mgmt agency problem out of control. Alternate theory is exec comp so high as insurance policy against catastrophic visible public failure; exec firings can be career ending. From this standpoint, top exec especially at highly visible and controversial public co should demand a lot due to career risk of failure. Particularly since exec blowups at this level not always based on performance; can be lots of political juju, need for fall guy, etc. Fourth theory, however, my personal favorite—exec comp so high as motivation/prize for best lower-level people to stay at big company. Versus leaving to go to increasingly attractive (1) venture-backed startups or (2) private-equity-backed buyouts. I.e. paying a few people at the top a huge amount of money keeps lots of lower level people on the hook due to enticing future payoff. My guess: exec comp levels go up from here, as end markets get larger, tech & market change happens faster, and jobs get more dangerous. http://pmarcatweetsasblogposts.tumblr.com/post/73998948125/w...