I’m puzzled by executive compensation

I find it easy to understand that Dan Brown makes $22e6 a year: He writes books, people buy them. He gets paid a percentage. I can even understand that Judge Judy makes $47e6 a year: she stars in a TV show that people (effectively) pay to watch. What I can not understand is how an executive at a big company can get paid $57e6.

I don’t read Dan Brown’s books and I don’t watch Judge Judy. But I can understand the cash flow. Privately, I think people could spend their time and money better, but that is a taste thing. I spend money and make people rich in ways that other people would not understand or approve of. Both Dan and Judy produce something that others consume and they get paid market rate.

I have not the foggiest idea of what it is that upper level executives in big corporations do to earn $57 million dollars a year. I realize that it is market rate in that lots of big corporations pay people amazing sums to work in an office, but I don’t know what it is that they produce.

I realize that corporations need management, just like they need engineering, but what kind of management costs $57 million a year? How many people do they manage? What intricate secret of management do they know that they can get more out of people than the manager at the local FedEx Kinko store doesn’t have?

Do they constantly meet with people and micro manage them. Do they have to think out work strategies for thousands of people and tell them what to do every day? That would be worth 57 million dollars because of sheer volume but I doubt any human can do that. What is it exactly that a highly paid “big” executive in a big company does?

It can’t be anything spectacular because organizations are pretty much inefficient and unresponsive and most companies with such enormous executive pay don’t really make any advance I would consider meaningful or provide any amazing service.

People who provide meaningful service to us on a day-to-day basis, like Doctors, Police, Fire, shopkeepers, teachers, professors all kind of have compensation within a order of magnitude. Everyone makes somewhere between $40000 and $250000 a year in general. Doctors go beyond that upper range (I know a doctor who gets paid $400000 or so in salary) and I kind of understand that, but again not really.

Personally, I would pay teachers, doctors, fire and police about the same. Those are very, every important things for me – and I think I would be happy if they earned about $150000 a year (using the Boston area in 2014 as a reference). I think that’s what they are worth. Teachers get paid far less and Doctors far more and I think this is strange.

In the end the ‘market’ decides the pay. I don’t think the ranking and disparity is ‘fair’ but that’s only a personal opinion and people vote with their feet to decide how much they will pay for the different services. I think, in the end, we kind of end up with a pay scale that, within an order of magnitude, makes sense given the services and products these professions generate.

What I can just not understand, is what is it that an executive physically does do take home $57 million a year? What is the product? What is the service? What do they produce each hour that some one eventually buys, that, when you add it all up, comes to $57 million in one year?

My conclusion is that it is basically hush money paid for inside deals done within the executive’s network.

What executives do in these positions is bring a ‘network’ of other people they can
a) Ask about important decisions in other companies or the government
b) Use to influence important decisions in such other organizations.

This kind of inside information allows the parent company to get ahead of the competition not by making a superior product but by rigging the customer’s decision process. The enormous compensation packages are paid not because they make something better. They get it because they are saboteurs destroying the ideal of the free market, where the consumer gets to see the wares and gets to decide what is better.

I am, at the core, an engineer type. I understand when some one builds something, repairs something or teaches something. I can even understand when someone manages a project. I understand this in the form of understanding how one guides a vessel. When it’s a small boat you can row and steer and decide where to go. When the boat gets bigger, you need an oarsman, a steersman and a lookout. They need to work together, so you need a captain. The best captain is one who has been, in turn, an oarsman, a steersman and a lookout. See, I’m no commie: I get management.

But I still don’t get $57 million dollar executives. I think I finally understand why they get paid $57 million dollars – it’s the same reason Dick Cheney is on the board of an oil company. It’s not that Dick knows a lot about geology and the use of machine learning to analyze oil field surveys. He knows something better than that: Dick knows people in the government who can effectively rig the price of oil. And that’s why, like all the other people in high places, he gets to be on boards and gets executive pay.

I don’t mean to pick on Dick in particular, but while I get executive pay, I don’t understand it and I don’t like it: it represents a grave inefficiency in our technologically driven free-market world.

The utility of wealth

Ubiquitous upward economic mobility is a flawed goal because wealth (and ambition) does not have the same utility for everyone.

The New Yorker (where James Thurber got his start) is still one of those places one can go to to think. I was browsing it this morning and found this article titled “The Mobility Myth“. The author suggests that we have never really been economically mobile and that, instead of trying to figure out how to make society more upwardly mobile, we should focus on raising the minimum standard of living.

I agree with the author’s overall statement. I have never quite liked loud arguments that we fix our skewed income/wealth distribution by chopping off the upper tail. The income equality argument has always struck me as jealousy in disguise. If there are a few people, like Judge Judy, who earn 500x more than Joe the mail man, I don’t think we are gaining that much by knocking down Judge Judy’s take home pay. I like rich people: they pay for my subway (though, often, they don’t and that is shortsighted).

I do think that we should make sure that Joe and his family gets affordable health care and his kids can go to an affordable school, where the teachers are engaged enough to make sure students stay in school and pass the requirements. By affordable, I mean that Joe and his family don’t have to make a choice between paying for health care and eating, or living in a safe neighborhood, or getting an education.

After such things are taken care of, I don’t think it is society’s business what Joe’s kids do. Upward mobility is often taken to mean that our kids will be richer than us. I’m not sure we asked the kids if they wanted that. It is taken as granted that the sole meaningful metric of personal progress is how much wealth an individual accumulates. Under such a metric society has failed if Joe’s kids end up in a lower (or even similar) economic bracket as Joe. This metric tells us that, if Joe’s kids become Postal workers or plumbers, society has failed (with a hint that Joe and his kids have failed too).

I think it is important to consider here that a person’s attitude towards wealth – material possessions – is shaped by the environment they are in. If Joe likes being a mailman, and if Joe’s family is happy with their lives it is likely (though not certain) that Joe’s offspring will be content to have what their parents had.

Many people would consider this a lack of ambition, and some people would say this is a vicious cycle, where Joe’s children, not having a role model for themselves besides Joe, never pushed themselves out of Joe’s socio-economic bracket. I might have agreed, a decade or so ago. But now, I rather think that Joe’s offspring have understood the meaning of life, which is to find what makes them content and to share that, if possible.

The feeling of being content is hard to measure, often even by ourselves. It’s not as spectacular as happiness, and it sounds so unambitious that it’s embarrassing to even study it so it doesn’t get measured. But I think, if the goal of society is to reduce the unhappiness of the population as much as possible, we should pay attention to the disparity of contentment – satisfaction with life – which is the goal, rather than wealth, which is only one of the many, many partial predictors of contentment.