CdM's red post for the day

[Martinus]

I think a lot of disagreement here comes from Yi and his side assuming that decisions of capital markets' actors are rational economically. This is sooooo 1960s Chicago.

[Zanza]

I think a lot of disagreement here comes from Yi and his side assuming that decisions of capital markets' actors are rational economically. This is sooooo 1960s Chicago.

The problem is that their individual rational decisions can lead to a bad outcome for most, e.g. overpaid CEOs.

[Siege]

You listening to Glen Beck now Yi?

No.

I do.

He's a mormon.  To him, you are gentile.  Hell, he verges on anti-semitism in his rants (which is why Fox canceled his show).  And plugs anti-semetic books on show.

Minsky told me to vote for him, and Minsky is way smarter than you and me.

[Admiral Yi]

I think a lot of disagreement here comes from Yi and his side assuming that decisions of capital markets' actors are rational economically. This is sooooo 1960s Chicago.

Which disagreement are you referring to?  I've already said I agree executive compensation does not reflect the will of the shareholders and the process should be reformed.

[Gups]

One of the difficulties is that compensation committees are typically made up of non-execs who are themselves CEOs or chairmen of other companies. It really is a "you scratch my back, I'll scratch yours" system and of course is self-erpetuating. X gets a big rise and Y has to get the same because that's what the market is paying.

[Zanza]

After the SEC mandated that CEO salaries must be made public, they rose even faster. Probably because CEOs could be envious of even better paid CEOs.

[viper37]

This is sooooo 1960s Chicago.

Not really.  Rationality of investors = trying to maximize their gains.
It has nothing to do with how they do it.  It's just that generally, investors in any given market try to maximes their wealth and decisions are based on this. 

[Richard Hakluyt]

One of the difficulties is that compensation committees are typically made up of non-execs who are themselves CEOs or chairmen of other companies. It really is a "you scratch my back, I'll scratch yours" system and of course is self-erpetuating. X gets a big rise and Y has to get the same because that's what the market is paying.

Yes, and, at least in the UK, most of the shares are held by institutional investors that also draw their leadership from the same pool of people.

[grumbler]

Structuring hedge fund pay as an option rewards increasing the volatility of results.  That's also a big problem with Raz's approach:  structuring pay based on performance sounds nice, until you realize that you can only reward positive performance and not punish poor performance.  That likewise structures the executive's compensation like a call option, and call options go up in value with increased volatility.

I think this is a fundamental, but also fundamentally misunderstood, concept.  When upside gains vastly outweigh downside losses, a volatile environment is desirable. That's not a rational market any more.

[Malthus]

One of the difficulties is that compensation committees are typically made up of non-execs who are themselves CEOs or chairmen of other companies. It really is a "you scratch my back, I'll scratch yours" system and of course is self-erpetuating. X gets a big rise and Y has to get the same because that's what the market is paying.

Yup. This.

[Berkut]

I suspect there is also a problem of "me-too"itis. I bet the really top notch executives are probably worth their huge salaries, from the perspective of what they add to the potential shareholder value.

The problem is that in reality only a few percent of the execs are actually that good. But all of them think they are that good, and what is more, most companies want to believe that THEIR execs are just as good as everyone elses. There isn't much chance that some comp committee is going to say "Yeah, Joe is a very average executive, and we think we should keep him since he does a good job, and pay him a very average salary...".

Instead everyone wants to believe that they are rock stars, and the people they employ are rock stars, and we should all be paid accordingly.

[Malthus]

I suspect there is also a problem of "me-too"itis. I bet the really top notch executives are probably worth their huge salaries, from the perspective of what they add to the potential shareholder value.

The problem is that in reality only a few percent of the execs are actually that good. But all of them think they are that good, and what is more, most companies want to believe that THEIR execs are just as good as everyone elses. There isn't much chance that some comp committee is going to say "Yeah, Joe is a very average executive, and we think we should keep him since he does a good job, and pay him a very average salary...".

Instead everyone wants to believe that they are rock stars, and the people they employ are rock stars, and we should all be paid accordingly.

I agree that's going to be part of it.

Add all of these factors together, and you get a system that acts like a one-way ratchet - compensation on average always goes up but no mechanism to make it on average go down ... untill you get some sort of major shock or failure. And even that doesn't seem to create a fundamental revamping.

[Razgovory]

You listening to Glen Beck now Yi?

No.

I do.

He's a mormon.  To him, you are gentile.  Hell, he verges on anti-semitism in his rants (which is why Fox canceled his show).  And plugs anti-semetic books on show.

Minsky told me to vote for him, and Minsky is way smarter than you and me.

I'm pretty sure Minsky did not tell you to vote for Glen Beck.