Archive for August, 2013

Executive Compensation Part II: Spoiling the Good Child

Aside from the objectively huge effect that executive decisions can have on a firm’s bottom line, there is at least one more compelling reason to pay top executives more than their own marginal product (in a sense). A professor once suggested to me that a CEO’s full marginal product includes not only the value of his policy, branding, and motivational actions, but also his motivational inactions. Basically, by over-compensating a CEO in terms of what he actually does, a firm presents a big carrot to anyone within shouting distance of the position. Of course, this practice shouldn’t begin or end with a company’s top man; indeed there are gains to be had from over-compensating employees at every level, even the ground level (consider a firms desire to attract the best entry-level applicants).

Obviously, this practice will always scale with the classical value of the positions in question; how big is the spread between the median dishwasher and one who performs in the 95th percentile? It will also compound towards the top, each supervisor is paid to increase the output of those beneath her, both explicitly and implicitly; the more supervisors and the more tiers beneath you, the great the ripple effect of your desirable salary.

I don’t think this theory is far-fetched in the least. As I’m not so well versed on the subject, it may even be common knowledge in relevant circles. What I do find very interesting are this strategy’s applications outside of the hierarchical firm.

All of this came very keenly to mind when talking to my 24 year-old friend who still lives quite amicably off the trough of her parents. The interesting thing is, her 21- year old brother is being cut off. My friend’s justification for her disproportionate compensation? She stays out of trouble, got through college in a reasonable amount of time, and does errands upon request. Her brother is hardly a degenerate; he does poorly in school, but still attends regularly, he stays away from hard drugs, doesn’t run in criminal or otherwise dangerous circles and is usually home at a decent hour. He is more impulsive, serially lazy, and temperamental, but you can squeeze a favor out of him now and then.

Basically, children are always better compensated, often into their twenties than the services they provide to their parents would ever warrant. But why the disparity in the case of my friend? She does provide more than her brother, but not nearly to the degree (and length of time) that she’s been better taken care of. My leading hypothesis is that my friend is enjoying the spoils of implicit motivational compensation. Just by being a relatively good child next to a less well behaved sibling, she enjoys the fruits of being a vegetable (carrot), that she likely wouldn’t if her wayward brother wasn’t around to, perhaps, learn his lesson.

There’s a Silverware Lining to the Restaurant Recovery

This. So Much This.

This is Ashok.

I’ve seen many posts today about our sluggish jobs recovery. Most people are pointing to data that show most of the job creation is in ultra low-wage, crappy sectors like fast food. (Here are James Pethokoukis, Tyler Cowen, and Mark Thoma on the matter.)

I think there’s a silver lining to this. Without considering part time jobs (which are not relevant to this post) there are three types of households: dual income, single income, and no income. The latter two indicate that one or both earners, respectively, cannot hold their job consistently, have high turnover, and are living off insurance.

Dual-income families have higher median incomes not only because there are two earners, but each individual earns more on average. Educated people from healthier backgrounds are more likely to get married – and stay married.

Let’s say I’m a genie. I can create jobs as I want. The…

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Executive Compensation Part I: Resolving Market Failures

When it comes to executive compensation, most people like to make it a distributive issue; the asymmetry of the typical large firm is just very off-putting for many. And the feeling comes from the tendency in most arguers to identify with the mass of workers near the bottom of the hierarchical firm, regardless of where their place may actually be. Some others go as far as saying that excessive compensation of CEOs is actually bad for the firm insofar as it increases turnover and decreases the quality of work at the bottom and over all demand for product (this last claim is common, but ridiculous). Overall, I’m not here to make a comment on what I believe optimal executive-worker compensation ratios are, or how distant those are from what we observe. I’m here to point out some interesting ways in which top executives, who seem so detached from a business’s direct sources of revenue, justify their enormous salaries. My general theory is that their skills and attributes as employees serve only to get them into top positions, but it’s the positions themselves, which are so valuable to good corporate governance, that demand high valuation.

Top executives are trusted to make sweeping policy decisions that can easily move markets and earnings in huge ways and, often enough, make or break entire companies. It’s my belief that the fact that most CEOs tend not to make horrible gaffs speaks less to the ease of the decisions (made with great advisory teams on hand) and more to the ability of boards to select great decision-makers.  One thing I’d like to consider is the kind of policy an executive hands down to alter employee behavior in such a way as to neutralize intrafirm market failures: instances in which rational behavior for individual employees collectively destroys earnings.

Take a simple example. At one point, “employees must wash hands” wasn’t even posted in the toilets at fast food restaurants and this was of course long before the days of disposable food prep gloves. No employee would go through the trouble of bringing in their own sanitary gloves when it wasn’t expected and some portion might not have even bothered washing their hands. One bold, though retrospectively easy, decision from a top executive immediately reduced instances of food poisoning and the associated legal/reputational liability and instilled a sense of cleanliness and security that dramatically increased brand value. After years and years as the law of the land, you can imagine the millions that such a marginal decision could tally up. All of that increased income is down to a single employee who, in making across the board cost-saving and revenue increasing decisions for his front-line workers, has increased their productivity in ways they would have never bothered to with very rare exception.

Regress of Authority: My Theory on The Foundation of Noetic Structures

While beginning to draft a post offering my theory on why I write what I write, think what I think, and do what I do, I found it essential to explain my theory of the origin of noetic structures. Another thing I found is that a cursory search will not turn up a satisfactory explanation of what a noetic structure even is; allow me. A noetic structure is a web of all an individual’s beliefs, the vast majority of which depend on other beliefs. A noetic structure, if drawn out, would show all the ways in which beliefs depend on each other for validation in the mind. In order to believe that you’re sitting in front of a screen, you need to believe that your senses give accurate representations of the external world, the existence of which you must also hold true. If you’ve ever entertained a child who asked you a simple question and followed it up with an endless string of “whys,” you’ve taken that child on a tour of your noetic structure.

Any non-self-referential (circular) noetic structure would have to contain some foundational, or ‘basic,’ beliefs that are not justified with reference to other beliefs. Strictly speaking, the only beliefs of this nature that stand up to philosophical scrutiny cannot be used as justification for others, but as a matter of convention, we accept the existence of the external world and other minds along with all that they imply. Beyond those two, most seem to take as given the reliability of ‘experts.’ You believe protons exist, but you’ve never seen the evidence for yourself; you take it on faith that the chain of claimants from the community of people directly observing subatomic particles to the person who told you they exist have been reasonably prudent in their assessments of the claim. From whence comes this faith on which modern humans’ world views rely? My claim is that it comes from Mom.

My theory assumes that infants regard their most immediate care-givers as essentially gods, capable of manipulating the whole of reality (as the infant sees it) on a whim; They can remove, fear, discomfort, and hunger with ease and right when its needed. Some anecdotal evidence for the continuance of this view into early childhood can be seen when toddlers run to mom to save them from a monster, something they seem not to know mom is woefully ill-equipped to handle. As they grow up, children only assent to the claims of others with mom’s blessing. “Listen to what Ms. Vicky has to say, she’s very good and has a lot to teach you,” “My mom says Billy only says Santa isn’t real because he got coal in his stocking this year.” Consistent reinforcement of the epistemic authority of teachers, books, and other knowledgeable adults is what weens children off of absolute deference toward their parents and ultimately empowers these other sources of knowledge with the ability to imbue new claimants with epistemic import.

I find the anomalous cases in which parents refuse to relinquish some measure of epistemic control the most compelling evidence for their place at the base of almost everyone’s noetic structures. Family-centric cults are probably the most glaring example of children discrediting sources for lack of their parents approval, but everyday religion provides ample evidence of otherwise intelligent people who’ve been through no special religious education foregoing their normal criteria for belief in favor of deferring to their parents’ beliefs. Of course the mechanism doesn’t remain the same as a child with any sort of freedom grows and thence comes the market for pseudo-academics and social niches for any crazy belief you can imagine. Once parents let children engage with society and its customary populist mode of argument, they need to defer to sources beyond themselves to repel the counter-current provided by outsiders.

My claim is ultimately that parents have the requisite tools to control which sources their children will take as credible, although control over content will scale with either the parents ability to exercise direct and absolute control over their child or the relative popularity of the desired content in society. Once you’ve ceded ground to schoolteachers or neighbors, it’s very easy to have sewn the seeds of your own incredulity. In principle though, the absence of any parental concession seems to guarantee a very shallow noetic structure, while liberal concession leads to many layers of differently weighted authorities whose claims are more susceptible to an informed sense of judgement.

Dissonance: Fun for Everyone

I suppose I’ve been beating up on the political left a bit lately, but I want to take this chance to remind my readers that I’m an equal opportunity hater. This won’t be a make-up post simply shaming the right for something, but it will begin a long regress toward my libertarian mean. Republicans and Democrats often find some neat rhetorical symmetries in their constant battle to differentiate themselves whilst remaining indistinguishable from a policy point of view and some of these symmetries often reveal glaring inconsistencies in their underlying ideologies. A pair that I’ve recently hit upon both revolve around the already ridiculous issue of immigration.

A common retort offered by conservatives against those criticizing their position on wealth redistribution is that marginal investment spending is more socially beneficial than marginal consumption spending, populist translation: we’re taxing “job creators.” The assertion is often coupled with a diatribe about how “it’s not a fixed pie,” i.e. investment can grow the economy and subsequently raise living standards across the board or allow for more beneficial redistribution at some later date. “A rising tide lifts all boats,” “the wealth will trickle down,” etc.

When it comes to immigration, however, the pie gets very fixed, very quickly. While economic theory and all the empirical evidence from the last 40 years has shown immigrants to add to the division of labor and indeed “grow the pie,” they only come to “steal” jobs from Americans by “accepting freely offered employment from American businesses.”

On the other side you have Democrats, the steadfast defenders of laborers everywhere and the unions that bring them dignity. What people tend to miss is that unions, while often increasing compensation for their own members, do so at the expense of scabs and aspiring professionals everywhere. There are many people willing to accept unions jobs for lower pay, and I think it’s fair to say that this willingness is indicative of their being in greater “need.” They are denied jobs because the labor market is either too selective or restricted in quantity, both on account of higher union compensation. Then there are people who see union compensation as an entry signal, grad students being a perfect example. They pour resources into getting credentials in hopes of getting the return of a comfortable and protected position, but often find themselves in debt and out of luck, or in the very unenviable position of adjuncts.

The dissonance? Those on the left tend to be more sympathetic to the plight of immigrants, whose situation is almost perfectly comparable to those of scabs and aspiring professionals. The American Union insists on keeping out wage and job competition, so would be immigrants are forced to live in squalor to protect the well-being of people no more deserving than they are.

All in all, the left have a better excuse in that it’s much more likely they are just ignorant of the disemployment and rent-seeking effects of unions. But of course, ignorance of the law is mitigating at best, not a full-fledged excuse. Happily, I think this leaves this post’s conservative bashing credentials slightly stronger on balance…