Archive for the ‘ Explanation/Conjecture ’ Category

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.

Advertisements

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.

People Who Complain About Growing American Income Inequality Are Sorry Excuses For Cosmopolitan Thinkers

Here is the kind of chart they like and here is another.

Here is a powerful theoretical explanation for stagnant or stalling average wages in a country and a world where many many more people are far far better off then they were in the 70s.*

Conjecture on why the theoretical explanation almost certainly applies:

The Second World War left the (only recently) industrialized world in ruins. While Europe and Japan rebuilt, American capital and infrastructure were wholly intact. When you consider the huge relative advantage of working in an industrialized economy to begin with, it becomes very hard to understate the significance of the United States’ position at the time. Moreover, Women had not broken into the peacetime workforce and bid down the wages of men. Median/Average income was at an all time high, shocking.

When would we say all of these socio-economic/historical factors began to shift against the lone male American household income earner? Hard to venture a better guess than the 1970’s. The European and Japanese recoveries/miracles were hitting full swing, we opened trade with China, women started entering the workforce in droves and the US economy hit a rough patch. By the time the domestic economy turned around, foreign competition in the labor market was well established and Reagan’s more liberal immigration policy coupled with the recovery to increase the number of low-income earners entering the American economy from abroad.

These trends have largely continued through today and they have been a boon to everyone. It would be very difficult to show that the median American family, or indeed the median Chinese or Indian family is not much better off than they were 40 years ago when we had so much more domestic equality. Technology and efficiency gains have been huge and they’ve been distributed all over the American economy; you’re reading this online article over free wi-fi on your smartphone, you’re no one-percenter and your parents would be awed by your lifestyle at this age.

So America’s middle class of old is in far better shape, the new middle class is lightyears ahead of what was likely third-world poverty a generation ago, but our focus needs to be the fact that we all live like shit because the greed and privilege of 3 million Americans making more than $250,000/yr is robbing us of the life we deserve. The truth seems to be that the middle class were the privileged ones, getting to press buttons and pull levers for fat suburban incomes while the rest of the world lived in real poverty. Now that those people who were once desperate have joined the global economy and proven themselves no less skillful than their American counterparts, the latter have lost their privilege that came at a great price to many millions of people and now sulk despite still living in the lap of luxury.

On the other side are the 1%: A tiny minority of people with highly specialized skills that few have learned despite many having the chance because they are that difficult to master and that dismal to learn even though they are the skills that let you make extremely important decisions about the structure of production that effect the income and consumption of millions. Given the boon to living standards we’ve seen due to globalization and the successful adoption of new technologies on an industrial scale, I’d say the people organizing it deserve quite a premium over the people stamping jars and balancing cash registers.

The moral of the story is that the people narrowly focusing on the slightest possibility that wealthy middle class Americans have been given a raw deal are they same people who call themselves champions of the poor and proponents of progress. My understanding is that humanism was progress in the 17th century and 19th/20th century nationalism was the conservative backlash; yet many on the left prioritize a return to a world of abject poverty for billions so a select few among their countrymen needn’t feel inferior to an even more select few, though this connection very likely does not occur to them. They are, at the very least, myopic, if not outright selfish and malicious in their drive to cultivate an elite that coheres to their aesthetic.

 

 

*The second graph was the best I could find in a lengthy search, nothing on global median income, but an endless trove of the headlining charts. This heavily underscores my point.

Admirable Leftists Are Teachers

In my last post, I criticized the argument for redistribution as justice; People below a certain standard of living have claims on the property of others by virtue of their existence alone. I find this line morally repugnant in the same way I imagine its proponents see vast inequities in wealth as morally repugnant. It’s truly an impasse of sentiments for which I can hardly imagine an agreeable form of adjudication.

The most popular alternative argument for progressive wealth redistribution is a pragmatic one. This argument is far more noble in my view for more than just its susceptibility to empirical and theoretical testing. The view simply states that a more even distribution of wealth allows for larger swathes of the population to have the time and resources to grow both in number and human capital leading to a bigger pie for all. The argument is more pro-human, pro-progress and anti-the political vitriol of the “soak the rich because they’re rich” entitlement argument.

Proponents of this latter view are environmentalists, not the kind that like trees, but the kind who think your low productivity is a consequence of your father hitting you rather than your having the genes of a father who would hit his own child. If our experiences, exposure and guidance were right and well focused enough, any one could be nearly as productive as anyone else. The reason the low-productivity workers live relatively worse and have children who follow in their footsteps can be put up to a lack of resources which is very difficult to overcome. Obviously, people have broken the cycle in the past and some do today, but the theory is that only a little cushion between each pay check and the hours of work that go into them would give the poor time to develop human capital and be more productive, have better pay, and a greater bounty from which to consume.

So, if you believe this and find yourself a young person in in the 60+ percentile of a developed nation, you become a teacher. The young poor have the time and resources (public education) to improve their human capital and build a better life for themselves and their children if only they’re properly motivated and directed in that time. Thinking as you do, who better to give them that motivation and direction?

As admirable as both the form of the argument and the follow-through of its adherents are, another merit of the argument, its falsifiability, lets it down, if only somewhat. The social science research comes down markedly in favor of genetic explanation for variance in income and intelligence. For income, genetic effects account for about 50% of income variation among men in Finland, a much less genetically diverse country than the United States. IQ studies trend toward 75% heritability. This means that environment can still account for up to half of income variation, but much of this can be put up to extremities much greater than the quality of individual educators.

This is, of course, one of the most contentious debates in academia and all I wanted to say is that there is a more admirable argument for redistribution than the one from justice and it happens to explain why teachers are so much more likely to be democrats without relying on the shoddy self-interested voter hypothesis.