[jlawson]

I just want to point out a mathematical error in your post.

You said, "nobody is 100x more efficient than anyone else". This is a reasonable (though not strictly true) statement by itself. But the implication is wrong - nobody needs to be 100x more efficient/effective to justify a 100x pay differential.

Consider an example:

* Company earns 1 billion per year.

* Normal-Person will increase profits 5%.

* Super-Exec will increase profits 10%.

--> Note that Super-Exec is only 2x more effective at increasing profits than Normal-Person.

Let's imagine we can hire Normal-Person for $100k. How much does Super-Exec have to charge to no longer be economical?

The difference in company earnings between the two is $50 million. So Super-Exec can charge up to $49,899,999 and it'll still be economical for the board to hire him. They'd be throwing away money if they hired Normal-Person when Super-Exec is willing to work for only $45 million.

These numbers are made up but in the same scale as how a big company really operates. The critical fact is that when the base amount of money being managed is huge, tiny differentials in performance translate to huge dollar values and boards are willing to rationally trade a large chunk of those values to execs in exchange for that performance.

[jjoonathan]

That should only affect Super-Exec's base pay if they can prove up front that choosing them can be expected to increase profits by 10%. Otherwise the "10% of profits" expected value figure needs to be diminished according to uncertainty -- which will send it straight back down out of the stratosphere. Yet that doesn't happen. Which suggests a different game is being played.

[djakjxnanjak]

When a company increases in value by tens of billions and then the CEO takes home hundreds of millions, it seems like there could still be a big discount happening.

[munk-a]

My point is that hiring someone more effective for that position may increase revenues but there is nothing inherent in that effective person that is yielding an additional 50$ million in profits that a normal person couldn't come out with a yield of 40 or 45 million.

This is a conflation between an important position (being able to resolve disputes and push decisions and direction) and being an important person. CEOs have skills, and have invested heavily in training those skills (if they aren't terrible) but those skills are not skills unattainable to the normal person, society just doesn't need very many people with those skills and the apparent value those skills create via business decisions appear to pay off handsomely. But that $50 million the exec's decision has made for the company isn't solely due to their work, if the company didn't have programmers and labourers and marketing and manufacturing to support the decision and deliver on the decision then that $50 million wouldn't have been earned.

Their decision is important, but their involvement isn't worth the full value the company receives based on making that decision, because without the supporting labour their decision may have been genius, but it would have netted no profit to the company. I think this sort of highlights what I consider to be a real issue with how we evaluate personal value in the modern world and why assets are becoming so concentrated in the hands of so few.

[ryandrake]

> CEOs have skills, and have invested heavily in training those skills (if they aren't terrible) but those skills are not skills unattainable to the normal person

This is an understatement. I'd wager that the average fresh graduate of a decent two-year MBA program has all the raw knowledge and business skills required to be the CEO of 90% of companies out there. What they do is not rocket science. The reason all of us are not CEOs is not that it's impossibly challenging or specialized, it's simply that there is only one per company and there are more people than companies. It's a small tent and not everyone can fit under it.

I've met senior executives who I considered brilliant and wise beyond belief, and I've met senior executives who I'm surprised could even tie their own shoes or back out of their driveway without running over their mailbox. There's no correlation with pay or prestige. They're all rich and beyond the point where career failure is possible, purely due to the rung of the ladder they happened to land on.

[smallgovt]

> Their decision is important, but their involvement isn't worth the full value the company receives based on making that decision

CEO's don't get anywhere near the full value the company receives based on the decisions they make.

The average S&P 500 corporation is worth $45B and grows earnings by 10% each year. The average S&P CEO gets paid $13.5 million dollars.

[jlawson]

The fundamental wrong assumption at the heart of your approach here is: The idea that people "should" be paid according to some measure of their moral worth or moral deservingness.

But when people meet to voluntarily make economic exchanges, they don't look at each others' moral deservingness; they look at where they can benefit economically.

[lordnacho]

This is true, but it misses a very important problem.

Noise.

Super exec might increase profits by more than normal exec, sure. How are you going to identify them? There's actually no way. All the ordinary selection criteria cannot be sensitive enough to sort the wheat from the chaff. Prior experience? They probably only had the job once. Recommendations? Passing the buck. Whiteboarding? LOL.

Chances are you will end up randomly picking out of a group that's mixed super and normal, and chances are you will end up with normal.

If you pay for super you will almost surely be overpaying.

[mactrey]

It may even be that:

* Normal-Person will increase profits by 5% and will dutifully inform the media of those gains

* Super-Exec will increase profits by 5% and will give a charismatic interview leading the market to believe that profits may increase by 10% the next year, which is reflected in an outsized 30% rise in the price of company stock

The board will hire Super-Exec for $50mm/yr because they all hold stock in the company and are thus more interested in the stock price than in the company fundamentals.