What I learned when I read this was that most rich people's lives are defined (just like most others' lives) by money, which is a depressing thought. A starving person's life will be defined by food-- organized around getting access to it, with constant intrusive thoughts about it-- but for most of us, it's not. We only think about food when we're hungry, we eat, and then we think about something else.
Most people who want to be rich want escape from money's grip, and it seems like that rarely happens. Either that, or freedom from money is not a monotonically increasing function of one's allotment and these people have overshot some sort of "sweet spot" at the level of the middling wealthy.
The grand takeaway was that living in a society ruled by money sucks even for those who have a lot of it. I wish the world were more like college in the sense that, when I was in college, I had no idea whether what my friends' grades were, and people weren't stratified into socially insular tiers based on GPA. The difference between a 3.9 and a 3.2 wasn't socially divisive in the way that the difference between $20 million and $7.50 net worth is.
> Either that, or freedom from money is not a monotonically increasing function of one's allotment
Well said. Freedom from money is a combination of factors: how much you have and spend in the present, and how much you expect to make and spend in the future. As people get more money it's very easy to ramp up your lifestyle and expectations to put more pressure on the future (instead of less). On the other hand, I know people who by focusing on what's important to them and adjusting their lifestyle feel fairly free without having millions of dollars. So (once you get to a decent threashold of earning) a lot of it is attitude as well.
>freedom from money is not a monotonically increasing function of one's allotment
This is linked IMO to the studies mentioned in this video, which find that motivation and drive at work are similarly not a monotonically increasing function of pay, but in fact there is an optimal pay rate beyond which drive begins to decrease.
There are a lot reasons why executive overpay makes CEOs perform worse at their jobs. Foremost among them is that it enables them to make short-term plays that are risky or harmful to the company in the long run. A $500,000-per-year job is one that an executive desperately wants to keep. A $25 million-per-year job, with four years' pay as a golden parachute, is one that can safely be blown up after a couple years. (No CEO intentionally blows up, but many take stupid risks driven by ego and status-based avarice that they would be less inclined to take if paid modest salaries and thereby more attached to their jobs.)
There are two reasons why executive overpay exists. The first is self-dealing by a small, socially closed elite. They do it because they can. The second is to motivate younger people who greatly overestimate their chances of ascending to such ranks: printing dreambucks, I call it. I would argue, were it not for the cultural corrosion the overpay causes, that executive pay is actually a very, very cheap mechanism for achieving the 2nd goal. Overpaying executives does motivate people to want to get to that rank. The problem is more subtle and cultural: what does it motivate them to do? Be more creative? No. Be more ethical? Certainly not. Be more ruthless? Sure, but "ruthless" is a hair's breadth away from psychopathic and workplace psychopaths (cf. Fiorina) can destroy companies.
Why do you believe corporate risktaking is harmful to the company in the long run?
If anything, I always thought the common criticism of big corporations is that they are far too risk averse. E.g., rather than taking a risk and betting it all on Maemo (an early linux-based smartphone OS), Nokia instead went the safe route and have now stagnated. Similarly, when problems arise, many big companies layer small fix after small fix on an existing system - it's much safer than investing $250M in a complete renovation.
Risk-taking isn't one of those things that's universally bad or universally good. For entrepreneurs, who have little to lose and a lot to gain, most risk-taking is good. For established companies, which have a lot to lose and a lot to gain, it's much more of a balancing act.
There are a lot of risks that have a moderately large upside and a huge potential downside, that tends to be delayed, that a lot of CEOs are given a lot of incentives to take. Mark Hurd with HP comes to mind: it's pretty risky to cut payrolls, gut R&D budgets, and focus mainly on really high-margin products like overpriced ink. The upside is a big bump in profits, but the downside risk is making your employees hate the company and getting killed when someone else starts selling slightly less overpriced ink. The downside tends to be delayed a bit, though, so CEOs who make $25m and get a golden parachute don't need to worry about it.
I'm not sure how you can characterize reducing costs and making short term profits a "risk-taking". If anything, it's the safest thing Hurt could do. Research is risky. Big, ambitious projects are risky. Selling toner isn't.
Also, most CEO's incentives are medium to long term, anyway. Compensation is usually a mix of cash and restricted stock, all of which goes down the drain if the company tanks. Take Ed Whitacre as an example - his pay is $1.7M in cash + $7.3M in restricted stock. His fortune is strongly tied to the medium-term (several years) value of GM.
The amount of risk isn't as important as the kind.
R&D project: if it fails, you paid people to do something that wasn't commercially viable. You have a lot of talent and knowledge under one roof. If it succeeds, upside potential is tremendous. You can move those smart people to another project that might have better odds of taking off.
Laying people off, not because you need to, but because you don't have the vision to make decisions you didn't study in business school: saves costs and usually pops the stock price for a few months, but causes the best people to leave when they can, trashes the culture, and fills the company with mediocrities and yes-men. Upside is minimal; downside is potential loss of the whole company.
When you phrase it this way, there is no incentive for anyone (CEO or shareholder) to prefer layoffs to a big R&D project.
With the R&D project, the CEO gets a big payoff if it succeeds, and loses only his stock options if it fails horribly and takes down the company. Big upside, no downside. With layoffs, the stock price pops for a few months and goes back down years later when the CEO's restricted shares are allowed to be sold. The upside to the CEO is truly minimal in this case.
You write as if the CEO is malicious and willing to lose money in order to ruin a perfectly good company.
Actually, it's more like this. Most CEOs aren't going to start R&D projects because (a) they'll pay off later, during a successor's tenure, and (b) vision can't be taught in MBA programs.
On the other hand, cutting the R&D projects and saying that "unprofitable operations" (even if they were profitable) were slashed will pop the stock price in the short term.
You're naive if you think CEOs don't have ways to benefit from temporarily popped stock prices even if their restricted shares can't be sold until much later. If they want to be a bit sleazy and secretly sell early, they can ask a spouse or sibling to short-sell or buy puts on the open market. Or they can use foreknowledge of the pop to hand one-day gains over to their friends. Illegal? Probably. (The reason I don't say "yes" is that insider trading has a technical meaning that most violations of the law's spirit don't meet.) Unethical? Yes. Likely to lead to jail time? No. Common as dirt? Yes.
It's pretty rare for people to commit insider trading violations for their own accounts, because it's easy to get caught. Instead, they tell their friends what is about to happen as a means of favor-trading. With that, it's pretty much impossible to get caught.
I don't think most corporate executives are malicious, so much as avaricious and narcissistic. Will they help their companies if it suits them? Yes. Will they hurt their companies if it suits them? Most of them will. The "we are the nobility and you are the peasants" mentality prevents most of them from caring too much either way about their companies; they care more about themselves, their friends, and maintaining their social class.
Risk-taking isn't one of those things that's universally bad or universally good.
Thank you. Degenerate risk-taking is bad enough, but criminal when other people will suffer most of the consequences.
Good risks generally have limited downside. For example, R&D projects and startups that, if they fail commercially, only cost the money put into them, are good risks. Bad risks are generally those that have huge downside and low upside, that are taken because the consequences can be pushed off onto other people. An example of this would be eschewing a $500,000 safety device on an oil rig under a mile of ocean, thus admitting (realized, thanks to BP) risk of ecological catastrophe.
Corporations are notorious for externalizing costs but where they really shine is in the externalization of low-frequency, high-impact risks that most people can't evaluate. They're great at that.
I think that corporate executives often find themselves in a place where boredom gets the better of them. In dysfunctional companies, a well-studied executive can add value. The reward for this is moving on to a better job at a better company. Eventually, the executive ends up as the CEO of a great company like HP before some awful CEOs did it in. Problem: the company is running well and doesn't really need a CEO. People are already doing great work without direction. Result: CEO gets bored. I know a day trader who increased his profits by refusing to work between 10:30 and 3:00. He could find good trades in the first and last hour of the day, but "boredom trading" in the bland middle injected noise and didn't make any money for him. Most big-company executives are bored traders: making capricious decisions that just add noise, just to feel useful and fill time.
> Corporations are notorious for externalizing costs but where they really shine is in the externalization of low-frequency, high-impact risks that most people can't evaluate.
So true. This reminds me Feynman's investigation of the Challenger crush.
He said "risky or harmful to the corporation in the long run" so I don't think he believes there is a causality connection there.
No longer trying to speak for the GP here, but I think that for many of the people that hate 'golden parachutes,' it violates their sense of justice. The entire company faces negative consequences when a high-risk maneuver fails, except for the CEO that decided on the maneuver in the first place. When a startup fails, I imagine it's very hard for anyone involved to avoid consequences, for the same reason it's easy to tell who in a startup is creating what value.
Also, how many millions does a CEO have to make before it qualifies as a 'golden parachute'? The last CEO of Nokia (Olli-Pekka Kallasvuo) had a sallary of 4.8 million euros [1] and the current one (Stephen Elop) got a $6 million signing bonus along with his $1.4 million salary [2]. Evidently, this amount of money wasn't enough, although I realize golden parachutes also involve severence packages that may not be disclosed at this point.
The real question on the effectiveness of golden parachutes is this: Are there any examples of large companies with golden parachutes taking high risks that paid off? Apple might count, but I'm not sure if Steve Jobs feared the consequences of failure after he had already been ousted as CEO once.
The main purpose of a golden parachute and cash comp is to allow a troubled company in trouble to get good talent.
Lets say Nokia's chances of success are 20%, but you have the ability to improve them to 30%. Suppose your pay package is 100% incentive based, you only get paid if Nokia survives. Why would you take this job? You have a 70% chance of getting nothing. It's much easier to go back to MS, and get a guaranteed paycheck.
In a few years, it will be easy to blame Stephen Elop and claim it is unjust for him to be paid even while Nokia tanks. But it isn't his fault that Nokia is in trouble (he's been CEO for 13 days) - he might be their best hope for survival. If he wasn't getting paid cash up front, he would probably just turn down the job and Nokia would be in even worse trouble.
(Not trying to endorse Elop, I know very little about him or Nokia. Just putting a face to the situation rather than speaking in the abstract about CEO A and company X.)
The main purpose of a golden parachute and cash comp is to allow a troubled company in trouble to get good talent.
At $1 million or more per year, you can get all the talent you need. I have more talent than 90+% of big-company CEOs in the US and I will work for less. What is actually being paid-for in getting a big-ticket CEO is connections and reputation. Don't misuse words like that, at least not the word "talent".
Reputation, in this specific case, refers to fame within a small and socially closed set of people who care more about contacts and image than accomplishments.
How long have you been running this conservative/troll schtick? It's entertaining and I commend you for your excellent execution of it. Let me guess, you also post on Autoadmit pretending to be a biglaw partner, right?
Maybe you could back up this claim with some information about yourself? Your HN profile doesn't link to your blog (which I found by googling what I guessed was your name), and your blog's prominently featured 'about' page is the Wordpress template. All I know about you is that you have opinions, express them well, and make up card games.
The way the money is made, and whether something must be done to sustain it, has an impact. If you're an executive in a traditional corporation, you're end up having to keep an absurd lifestyle because you're a professional social climber and, the minute you retire from the shenanigans, your earned income drops dramatically. If you made your money in a lump-sum acquisition, or have a high salary because of talent and skills rather than social advantage (it's rare, but it does happen) you're in more of a position to enjoy your money.
At the upper tier of wealth you have people who aren't social climbers per se but are really competitive. Next down, you have most of the social climbers trying to turn their money into status (which begets more money).
Actually I was an executive at a traditional corporation (a GM at Microsoft) and before that a founder/CTO at a venture-funded startup ... You're very right that there's a lot of competitive pressure (and social climbers) but we always avoided it.
I wonder if there's a selection effect at work here, in that the majority of people who end up being very rich are those whose lives are defined by money. After all, why would you work your ass off to make more money than possibly can have a meaningful influence on your life unless you were driven by the idea of money alone?
1. Imagine a dude who just wanted to build something cool. Craig Newmark, of Craig's List fame, for example would fall under this category. He's got enough money to retire, yet he still works customer service, because that's what he enjoys.
2. Now imagine, someone who just wants more, more, more, more. It appears Donald Trump might fall into this category. I don't know for sure, but he seems to be purely driven by money and power.
You can become wealthy 'organically' in the sense that you didn't set out to be wealthy. You can so get wealthy from the expressed intent to get wealthy.
Any person I know who is rich and has become so through their own hard work bristles at the thought of spending a lot of money on anything, even a cup of coffee.
I've know some who want a Mercedes but hate the thought of paying so much for one and some who have taken out the motor and put in a Chevy motor to save on repair costs.
People with money don't spend money they have, people who don't have money spend money they don't have.
I think people tend to go into that game being decent and come out of it corrupted. In high school and college, they wanted to be writers. But investment banking seemed safer. Some failed out, but others got all their promotions, their MBAs, their first millions at a ridiculously young age, and started drifting away from their "interesting" (but poor, by banker's standards) college friends and into a certain money-centered social circle. People don't like to admit this, clinging to the notion of an atomic "self", but a few years in that kind of environment changes a person into someone unrecognizable by the younger, better person who went in. People who were once fascinating to talk about about all kinds of topics with devolve into defectives only capable of talking about mergers and acquisitions, people who talk fast and sound intelligent but, if you actually listen to the words they are saying, have almost no content in anything they say.
An unbroken pattern of severe wins and losses in the working world is usually corrosive to one's personality. Losses make people bitter and they either collapse or deeply desire, even at psychopathic cost, to win. Too many wins, especially those of the "windfall" kind and much less those that come from genuine hard work, make people shallow, childish, and impatient.
One set lives in a world where the assessment of one's work is extremely subjective and changes with political fads, a world in which 90% of the most successful (who are never the most talented or best) are social-climbing charlatans and cerebral narcissists who cultivate defective personalities in the hope that their flaws will be taken as proof of creative genius. This they do while creating elaborate fictions, plots, and intrigues, selling nothing of true use, while their products occasionally inspire heinous crimes and suicides.
Most people who want to be rich want escape from money's grip, and it seems like that rarely happens. Either that, or freedom from money is not a monotonically increasing function of one's allotment and these people have overshot some sort of "sweet spot" at the level of the middling wealthy.
The grand takeaway was that living in a society ruled by money sucks even for those who have a lot of it. I wish the world were more like college in the sense that, when I was in college, I had no idea whether what my friends' grades were, and people weren't stratified into socially insular tiers based on GPA. The difference between a 3.9 and a 3.2 wasn't socially divisive in the way that the difference between $20 million and $7.50 net worth is.