You have 20 employees, and one manager. The manager makes twice as much as the employees, because customarily managers make more than their subordinates.
In a small business, the manager is the owner, and his salary is twice as much as the average worker.
Now say you are a bigger business, and you have multiple outlets in the region. Your regional manager manages 20 outlet managers, the 20 managers each manage 20 employees. Your regional manager makes twice as much as the outlet managers because managers make more than their subordinates.
Now say you are a national business, and you have 20 regions each with 20 outlets per region. Your national manager manages 20 regional managers. Your national manager gets paid twice as much as the regional managers.
And say you're an international business, and you have a presence in 20 countries each with multiple regions with multiple outlets. You manage all of the national managers, and so you get paid twice as much as them.
The small business has a situation where the business owner makes twice as much as the employees.
The international business has a situation where the top of the management chain makes 32 times as much as the employees.
That's using a really simplified model, but the larger the business, the more layers of management will likely exist, and we have a system where management expects to get proportionally more money than those they manage. That's discounting any human or sociological factors that might contribute.
I think the biggest change that could correct this issue would be to do away with the idea that your boss makes more money that you is just a given.
With public companies it's more a case of what a remuneration committee - itself composed of multimillionaires - has to take all this into account when approving the salary package when their preferred candidate for CEO has requested an additional $X million
If the less preferred CEO candidate is marginally less efficient in maximising profit it costs the firm $XX million. A botched acquisition costs $XX-XXX million. Misguided strategic changes could cost $Xbillion over the next few years and be irreversible. If the markets disapprove of the less-preferred CEO candidate their appointment might even wipe $XX million off the share price overnight, before they've even had a chance to act.
How much the lower echelons of staff able only to affect the performance of their own department earn doesn't even enter the calculus, except perhaps to note that the new CEO can certainly justify $X million more if he's really good about identifying which areas those staff need to be cut.
There is one piece of received wisdom in this article which is particularly problematic: "But managing a multinational firm such as Walmart requires a different—and much rarer—set of skills than that required to run a corner store."
This is simply not true. Executive skill is very highly overrated. There is no "magic" these overpaid executives have that uniquely enables them to run large companies. This received wisdom probably comes from the efficient-market hypothesis, in the sense that if executives are paid so highly it must be that there skills are amazing and valuable. This need not be true. It may very well be due to a mix of cronyism, posturing, and self-promotion.
Let's end this nonsense of executives being the crème de la crème of intellectual superiority.
>>> This is simply not true. Executive skill is very highly overrated. There is no "magic" these overpaid executives have that uniquely enables them to run large companies.
To some degree I agree with you.
Some of the most profitable companies I've worked for have very shrewd CEO's. I worked at a bike shop when I was still in college (Eriks Bike Shop). The guy started his business when he was 14. When I worked there, he still only had around 10 stores. One of the smartest things he did was get real estate in smaller areas, off the beaten path and grow his customer base. Once he had a big chunk of the market, he'd close those stores and open a bigger shop right off the highway, near the old store. He also had a very close knit group of people at the top. As far as a I know, it's still just him, the VP of sales, the head IT guy and one other guy. Less than 6 guys effectively now run 22 shops in two states and do multi-millions in sales every year. Erik never went to college, and started this right out of high school. A good example of someone without the groomed skills you're talking about.
The other places I've worked, like most of the bigger fortune 500 companies, they usually had Ivy Leaguers who either had PhD's in either business or economics or both. To me, these skills aren't overrated. If you've gone to Yale for 8-10 years and have a PhD in Business Management, then yeah, you have skills which most people will never have. As such, they have certain abilities and insight most other people don't. To me this makes them uniquely qualified to run large businesses. Not just their degree, but also the market and business insight expertise is crucial. Sometimes I don't think you just get that from working in a certain industry for a certain period of time.
If you've gone to Yale for 8-10 years and have a PhD in Business Management, then yeah, you have skills which most people will never have. As such, they have certain abilities and insight most other people don't.
I don't think that this is relevant to their ability as an executive. In the same way, I generally don't see PhDs being good developers or engineers. In some cases it denotes passion, but more and more these advanced degrees seem to only signal a desperation to get a piece of paper and an inability to escape from a fairly exploitative and abusive system.
It's also telling that having spent several years in the world's best business schools in addition to extensive years of management experience, top CEOs are quite happy hiring McKinsey to assign fresh graduates to undertake critical analysis and make recommendations for them. If there are research projects ideally suited to those with exceptional academic pedigree and the CEOs choose to delegate them to commodity smart-kids instead, it's a pretty good indication they're not convinced their academic experience was all that meaningful.
Sounds like your bike shop friend as an incredibly rare skill-set to pull that off. Out of a million people how many of them could start a successful chain while still a teenager, even with great luck?
Is there really room for one million people to have a chain store? Who would shop at all of those chains?
It's like the pyramid schemers (I mean network marketers) who make claims about how you too can have all that sweet passive income. No, the structure only allows for a small percentage of the overall population to sit at the top, no matter how 'lucky' or 'skilled' an individual is.
> No, the structure only allows for a small percentage of the overall population to sit at the top, no matter how 'lucky' or 'skilled' an individual is.
Yes, there is only so much room in these kind of schemes at the top.
However, I don't buy this statement that "skill" is not involved as I have seen certain people simply rebuild these kinds of networks over and over.
There is a real skill in being able to work a weak, but large social network.
Are executives god-men? Probably not, but I suspect, as is often the case, the job seems a lot easier than it actually is.
I find engineering types are especially prone to underestimating the difficulty of other jobs, and we have very little context to evaluate executives who have very little overlap with engineering.
Executive only needs to do a few things well but the reality is VERY few people can do those things well.
A good executive turns people into tools. You offload your problems into the minds of others and then efficiently recoup the outputs. This is far more difficult to do well than one might think. The sheer volume of things that need to be orchestrated and then mentally cataloged when you operate at that level is overwhelming for most people.
It's more than that - a good executive turns people into tools while at the same time making each of them feel like they're a beautiful, unique, snowflake whose contributions are highly valued. People don't do their best work when they feel like mere tools.
The problem is that very few of the people who have those jobs can do them well. Most executives fall quite short in most of the necessary areas. But they manage to skate by anyway.
What? Has anyone ever met an executive? They are abusive, power-hungry, and ruthless. Our tech folk hero Jobs is a perfect example. Their power and salaries inspire at best fear and at worst resentment and contempt. They do their best when they step back and let experts do real work, taking care of the administrative and management details so people with real skills don't have to. They climb corporate power structures because corporate power is what's important to them and they've learned how to get it.
I recognize this is all anecdotal but the outpouring of anecdotal executive-sympathy in this comment thread is mind-boggling; a little push back in the other direction seems not out of line.
....you do realize that Steve Jobs built the power structure he sat on top of, that it floundered when they pushed him out in the 80's, then became successful again when they hired him back in the 90's?
Certainly personal wealth wasn't a motivating factor for him, but that doesn't disqualify him as the perfect poster child for my point. The point at hand is the general character of executives: they inspire fear (check), they are power-hungry (check), they are abusive (check).
Yes, this is an excellent point which has application in many contexts. We simply don't know how rare the skills are, because the positions are so rare. There might be 100 million people who could do the job at Walmart, but there are not 100 million Walmarts. There aren't even 100 million paths to get to the CEO position, and while there is certainly some economic Darwinism at play in determining who gets on those paths, I suspect that it's overwhelmed by noise as people carom around the socio-economic network like the balls in a lottery machine.
Interestingly I'd attribute the ability for firms to grow ever larger to engineering. There have been more and more improvements over the past 5-10 years that allow a decoupling between business groups so they can work effectively together with fewer coordination costs. Basically everything SOA, means business units are easier to manage because the interfaces they consume from other business units are better standardized and the tools to consume them are better.
Basically, executives aren't getting better. The tools that the employees that work for those executives are, so much so that the employees no longer need to go through the command and control hierarchy to get things done across business units.
> Let's end this nonsense of executives being the crème de la crème of intellectual superiority.
Right, but let's not pretend that executives are just you're "everyday folk". It still takes a specific set of skills, excellent interpersonal ability, leadership, drive, and a few others. It isn't a walk in the park, show up 9-5, and earn a nice paycheck.
So don't be so quick to just "write executives off". Odds are they have a lot more going on than one may think.
Oh please, everyone thinks they could do a better job until they actually end up on top.
90% of being a leader isn't necessarily having a specific skill or specific domain knowledge, it's about having the courage to make unpopular decisions, dealing with the fallout alone, and leading by example when the going gets tough.
90% of develop skills is trial and error. So in this sense it's not really any different or particularly difficult, I'm certain most people would do ok at it given enough trial and error experience.
I would suggest ruthlessness is the key to running something like Walmart as successfully as they run it. If the people in charge were much less ruthless, it would be a less profitable enterprise.
One area where executives are exceptional is in social skills. You have to know how to get instant trust from just about anybody, and when they are talking with anyone they can make that person feel important. You also need to never decompensate under pressure.
Other than that there aren't any specific job requirements, you could be the CEO of a company like General Motors and not know a lot about cars because you've got plenty of people around you.
Is there evidence supporting this, or is it simply something you'd want to have in the platonic ideal of an executive (genuine question, not an attempt to be snarky)? I certainly have never been inspired to place an overabundance of trust in any of the executives I've toiled for.
You might be right, but the social skills you've described don't sound all that valuable to either the firm or society as a whole. We would benefit from a model for the organization of investment that doesn't promote these particular individuals to the top.
The social skills are a necessary (but not sufficient) part of the real skillset of a successful executive: being able to navigate a number of contradictory desires from various stakeholders, and then quickly make decisions that piss off the fewest number of important stakeholders.
People who have only logical/analytical skills usually fail because they're blind to the emotional realities of the people they deal with. They may be able to make great decisions - when all of the trade-offs are carefully spelled out for them. But when you're CEO, the vast majority of important information is unstated, in how people feel about a course of action, and developing those social skills is necessary for quickly taking the emotional temperature of a room and understanding what people really desire, how much they desire it, and what you can do to make them happy.
Conversely, people with only social skills get paralyzed by decision-making when thousands of people are involved. They want to make the people closest to them happy, which means pissing off a lot of people who aren't complaining now but soon will be. That's the "difference between the corner store owner and Walmart CEO" that the article is talking about.
The best executives I've seen manage to combine deep emotional intelligence with deep intellectual intelligence. They can both quickly understand how everyone is going to feel about a decision (including, particularly, how the people who are going to be hurt by it will feel), and then select a course of action that minimizes the hurt and maximizes the benefit, understanding all the time that some people (often, many people) will be pissed off at them.
Well. If the average size of firms has gone up so has market concentration. Market concentration brings market power, market power brings arrangements that favor those who hold that power.
In general, markets with low concentration are defined by competition while markets with high concentration are defined by power. For measures of concentration see the HHI or the concentration ratios.
I've wondered if 401k plans and IRAs have held back small businesses because people could have spent the money to start their own businesses; it is horribly difficult to beat an S&P 500 index fund, but the popularity of those funds mean a lot of people are spraying money at them.
The hidden fees of 401k plans have been displaced to Wall St firms unbeknownst to most participants because they don't show up on statements, and because the balance that people see on their statements give an inflated sense of how much they have saved, even though they still need to pay taxes when they withdraw.
It also diverts money away from more conservative long term investments in tangible wealth like real estate and into the stock market, so people are less diversified and lose out when the markets go down. 401k's really only let you take long positions, while financial firms can take either side of the trade... you can reason out who the winner will be in that situation.
Those things aren't significantly different compared to pensions. In a pension your pension fund will be paying wall street fees. You have even less control to be able to do things like invest in real estate with a pension. At least in a 401k plan you can potentially invest in mutual funds that are proxies for real estate.
I have an IRA through my employer (which happens to be my own company, but that's irrelevant). I can bet against the market via ETFs if I want in my IRA. Your employer just chooses a plan for you with crap flexibility.
I think the biggest change has really been the social acceptance of massive consumer debt. I cringe so hard every time I hear someone say something like, "I paid down my credit card a bit so I could buy that new XBox." People didn't used to live that way and the removal of pensions had nothing to do with that. I would still put a lot of blame on Wall Street there, but not because of fees on retirement plans.
I agree with you... my statements were actually specifically about 401k's, and whether or not they contribute to capital misallocation. Almost all 401k plans are much more restrictive than IRA accounts. Personally I think that a self-directed IRA is a fantastic vehicle where you can buy actual real estate etc, but they are so far outside the norm that they almost don't exist when speaking in generalities.
I also agree about the social acceptance of consumer debt. They say you learn from your mistakes, and boy have I done a lot of learning. Resolving to get and stay out of debt is a life changing decision for sure.
401k's and IRA's are not obligatory. If you wanted to invest your money to start your own business, no one is forcing you to put that seed money in a retirement account. Plus Roth IRA's can be withdrawn from at any time...
And, even if retirement accounts do impinge a bit on things like small businesses, do remember that stable retirement prospects are a social good.
As I understand, this is exactly what manipluating the federal interest rate is about targeting: they're changing the incentives on different investment types. When federal interest rates are low, this pushes people to search for other (riskier) investments.
Also, I wonder if 401ks and IRAs have that much weight in the grander view of "invested" money saved away, considering their tax-deductability, and thus appeal as a savings plan, is limited and constrained (this year: $18k for a 401k, $5.5K ($6.5K if you're over 50) for IRAs).
Someone from the top 5% is more likely to hold their a wealth in equities, then the Average Joe from of the 50%. The top percentiles may be paid more, but they are likely to make far more in the long term on their investments anyways.
In this sense inequality is unavoidable fact of life. Much the same as some people are gifted with genes making them more likely winners in a long distance running contest. Unequal but hardly unfair as long as a fulfilling life is possible regardless of such deficiencies. The problem should be phrased in terms of opportunities and social mobility, instead of inequality.
I often wonder if the world would be a better or worse place if (somehow) companies were limited to something like 5,000 employees. Is there a threshold which allows diversity and efficiency but restricts dominance?
Well duh... is it really a surprise that the consolidation of wealth and the consolidation of firms owned by the wealthy is correlated? Next you're going to try to tell me that this is correlated to their undue influence over the political system...
It is ironic that a publication owned by the Rothschild family is espousing these views.
Say you are a service company.
You have 20 employees, and one manager. The manager makes twice as much as the employees, because customarily managers make more than their subordinates.
In a small business, the manager is the owner, and his salary is twice as much as the average worker.
Now say you are a bigger business, and you have multiple outlets in the region. Your regional manager manages 20 outlet managers, the 20 managers each manage 20 employees. Your regional manager makes twice as much as the outlet managers because managers make more than their subordinates.
Now say you are a national business, and you have 20 regions each with 20 outlets per region. Your national manager manages 20 regional managers. Your national manager gets paid twice as much as the regional managers.
And say you're an international business, and you have a presence in 20 countries each with multiple regions with multiple outlets. You manage all of the national managers, and so you get paid twice as much as them.
The small business has a situation where the business owner makes twice as much as the employees.
The international business has a situation where the top of the management chain makes 32 times as much as the employees.
That's using a really simplified model, but the larger the business, the more layers of management will likely exist, and we have a system where management expects to get proportionally more money than those they manage. That's discounting any human or sociological factors that might contribute.
I think the biggest change that could correct this issue would be to do away with the idea that your boss makes more money that you is just a given.