I'd say it's exactly the other way round: the CEO definitely has to make decisions that impact the company far more than what 10,000 line workers do, for better or for worse. The open question is whether the commonly used pedigree/qualifications that decide who gets to be CEO actually enable people to make substantially better decisions.
Without the line workers, there is no product. Without a CEO there is no product. They're both but-for causes (in the legal sense), and in that sense equally indispensable.
What you need is a sensitivity analysis, of profitability of the company versus changes in CEO versus line worker performance. I'd imagine you'd find that a 20% efficiency jump in the line workers would have a much bigger change on the bottom line than a 20% better CEO.
If you permanently eliminate the position for one line worker, there is essentially zero impact to the company; it continues along with only a 0.01% drop of efficiency. If you permanently eliminate the CEO position, there is multiple orders of magnitude greater impact to the company. That's why the compensation for each role is different.
You've just reiterated the value theory of labor, first expressed by Karl Marx.
I take it you're a Communist then, and follow Communist thinking in other economic thought as well.
The classical economic theory of pricing holds that goods (and labor) are exchanged at a point where the supply and demand curves cross. This, according to the principles of free markets as expressed first by Adam Smith and subsequently refined, and has certain prerequisites including low barrier to entry, equal access to information, fair and open competition (and a lack of collusion on the part of either buyers and sellers), and a clear understanding of value.
All of which undoubtedly hold true for the CEO employment market, I trust.
Karl Marx allowed for supply and demand, quoting Adam Smith himself, and I believe, describing the status quo of the era:
" It suffices to say that if supply and demand equilibrate each other, the market prices of commodities will correspond with their natural prices, that is to say, with their values as determined by the respective quantities of labor required for their production."
I don't think that this disagrees with the classical economic theory you mention, in any way. Would you to care to explain your point in a little more detail please? If anything it's one of the refinements that you speak of.
I'm not being dishonest here, I genuinely can't spot the difference. I have difficulty in spotting what aspect of biot's statement is inherently communist.
In Marx's own view on how things ought to be, paraphrasing, communism was a world in which each gave according to their abilities, and received according to their needs.
In this communist scenario, what each person contributed has no bearing on their compensation. So by supporting the current status quo, biot is not in my opinion expressing Marxist views, in fact, quite the opposite.
In fact, I've heard people denounced as communists for wishing for wage caps.
My point isn't that Marx was correct (I really haven't studied him more than topically).
It's that a lot of what's passed off as free-market capitalism is anything but.
In biot's case, arguing that the value generated by an individual should serve as the basis for that person's pay. It isn't, but is only one input (essentially defining the demand curve, and setting a possible upper limit), but the true market pay scale being one that would also have to take into consideration supply. As I noted (somewhat snarkily), market conditions for establishing executive pay fall somewhat short of the free market definition. For a more popular treatment, Eddie Murphey and Dan Akroyd's "Trading Places" explores a similar idea. Mark Lewis's writings on the stock market provide some insight on trader qualifications and pay.
A friend some years ago provided an intriguing argument for why financial traders' pay was as high as it was. It was less a conventional market pricing argument than one of creating incentives to minimize incentives for fraud. Essentially: we're going to pay you so goddamned much money that you'd be completely mental to try to cheat on us and lose out.
I really cannot speak to the merits of this.
What that, and numerous other arguments for the rich getting ever richer do suggest is that there is a class of people who are very well versed at rationalizing their income and remuneration rates.
There's also a great deal of very, very, very sloppy thinking, rationalization, reportage, etc., in economic matters.
I'm also coming to feel that much of economics as it's been taught for the past 150 years or so simply isn't so. That the conditions described by free markets are far less common and far more fragile than commonly believed. That much of macroeconomics is bunkum used, again, to rationalize why them that has gets more (though, oddly, I'm also coming to understand money, fiscal policy, and Keynesian theory better than ever before), and that much of the economic gain is really a power game played for leverage and advantage, rather than for strict financial gain. A lens which makes the MPAA/RIAA, copyright, patent, trade and immigration law, etc., far more understandable.
A lot of things clicked for me when I tried to wrap my head around the concept of money as debt. A debt to be paid by the rest of society to the holder, when he's in credit. Or a debt to be paid to the issuer if the holder's a borrower. I'm not going to pretend to understand economics in any great depth.
Thanks for your detailed reply, I was thrown by the communist thing, and missed your point almost entirely.
If you haven't read Debt, the first 5000 years, do. I've managed to misplace my copy -- aha! just found it -- but it's among the most fascinating books I've found in 25 years on economics. That, Niall Feguson's Ascent of Money (the guy is in many ways an ass, but this is a pretty good book), Nassim Taleb, Nouriel Rabini, Paul Krugman, Joseph Stiglitz, The Ordinary Business of Life: A History of Economics from the Ancient World to the Twenty-First Century (Roger Backhous) -- hardly a page-turner, but a very good compendium of 3000 years of economic thought, and Neal Stephenson's Cryptonomicon and Baroque Cycle have been very helpful to my understanding.
One of the values in these online discussions isn't the ability to convince others nearly so much as it is to hone and refine your own arguments. I'm not sure I'm even partially cogent yet, but I'm starting to stumble in a direction I like.
Oh jeez. Either I should have thought through my last sentence better, or followed my instinct by not participating in this discussion. You are correct on the supply & demand explanation. And no, I am not now nor have I ever been a member of the communist party. :)
I make the point because you're not the first person I've heard use the same argument.
Most recent that comes to mind was a banker interviewed on the BBC. I was listening, critically as I frequently do, and realized that the view he was espousing was flagrantly Marxist.
The biggest myths of our societies are that we need a hierarchy, directions and managers. We're quite capable of leading ourselves and getting everything done. And more efficiently, no less.
I thought the salient point was the relative compensation of the average CEO to the average employee. What insight do you gain by comparing a mass exodus of every employee to a vacation by a single CEO? Isn't it trivially obvious that if every single person in a company takes off at once, that the company is effectively stopped regardless of who you compare it to?
> That's why the compensation for each role is different.
This is wrong. It's Econ 101. Salaries are the price of labor, and like any other market, the price of labor is the result of equilibrium in the supply and demand in the labor force.
When does a CEO get to take 2 weeks off these days? A CEO's job and life are homogeneous and while they do take vacation, I can guarantee you that very very few will disconnect him/herself completely.
10,000 line workers can easily be replaced by another 10,000 people with (likely) little to no education, credentials, etc... CEO on the other hand? Doubt it.
Contribution as a term here is fluffy. I know what you are getting at but it makes no sense using it for some sort of comparison.
What you need to look at is impact of decisions. If the CEO makes a wrong decision the entire company can go down. If a worker makes a wrong decision it's much less of an issue.
Contribution is a term that can be pinned down (I suggested using a sensitivity analysis above).
I don't see any particular justification for "What you need to look at is impact of decisions." Why is "impact of decisions" a more important criterion than "who does the work."
Say you have a median CEO and median line workers. If you got a CEO 20% better than the median, would he be able to motivate the line workers to be 20% more efficient? Highly unlikely. I think you need a 10x median CEO to see something as huge as a 20% jump in the efficiency of line workers.
I agree that we can talk about the median CEO, because that just requires ordering. But how would you talk about a 10x CEO? That needs multiplication on CEOs, which is much harder to define in a way that makes sense.
...oftentimes by applying the "beatings will continue until morale improves" philosophy of firing teams, cutting departments, slashing r&d and expecting unpaid overtime. There, efficiency *= 1.20.
>If that works in the long run, it's great for the shareholders.
My point is that it does not work in the long run, but shareholders are sometimes interested in the short-term gains (as in improve efficiency by 20%, flip the company, not my problem)
But think of the labor costs. Can you get a 20% better CEO with 3 million dollars? Probably. Can you get 10,000 line workers 20% better with 3 million dollars? Probably not. So even if the line workers are more important, a large CEO bonus may provide better value.
I'm not arguing that the CEO is overpaid. I'm pointing out that the amount the CEO is paid is not determined by value to the company, it's determined by supply and demand in the labor market.
But, and I shouldn't have to say this it's so obvious, there wouldn't be demand in the labor market for CEOs if boards/shareholders didn't think elite CEOs provided value. There has to be a strong correlation there or the inefficient company paying a low value CEO too much will be out-competed by another company with more sense.
Say CEO X provides V units of value to the company. What should CEO X be paid (P)? It has nothing to do with Y, except in the degenerate case where P > V. P is going to be determined by the supply of CEO's with credentials similar to X. P can vary dramatically depending on that supply, but obviously V doesn't change.
