When Randall Stephenson announced he is retiring from his role as the CEO of AT&T a few weeks ago, he sure caused a stir.
Donald Trump took an instant swipe at him on Twitter. Clearly, no love lost between CNN and the White House these days.
Take that, Stephenson!
Others were slower off the mark. The astounding compensation the outgoing CEO will receive for his services might have had something to do with it.
$64m in pensions, another $28m in deferred compensation – and that’s on top of the ~$30m per year Randall cleared over the past few years.
Even the most grizzled private equity or investment banking professionals took a while to get their jaws off the ground.
“For $100m, I’ll take all the Trump tweets in the world”
Race To Infinity
There are a few reasons for the never-ending upward spiral in executive compensation.
Ostensibly, CEO pay should correlate with the task at hand: running mammoth corporations isn’t easy. Unfortunately, as Randall’s tenure proves, you can hardly link pay to performance. Here’s what Barron’s had to say about his performance:
The cosy ecosystem of CEOs and board members helps. As far as side hustles go, you can hardly go wrong with sitting on a corporate board these days.
Attend a few meetings a year. Sit on one or two board committees. Opine (ever so softly) on the company’s strategy.
Hardly the definition of back-breaking labour, yet often rewarded to the tune of hundreds of thousands per year.
Want to build a reputation as a principled board member, willing to challenge the CEO?
You are more than welcome to. Just don’t expect to be invited to any other boards once your tenure expires. It’s a closely-knit community, one that understands quid pro quo like anyone else.
Then there’s the way the compensation committees work.
Everyone benchmarks their companies in the top 50% of the playing field, if not further up on the spectrum.
If you don’t, that doesn’t shine a good light on your abilities as a corporate steward, does it?
Inevitably, this means most boards try to pay their CEOs at the top of the range. The top half is reset every single year, accelerating pay inflation.
But what does it have to do with people like you and me – and our desire for financial independence?
Unfortunately, more than we want it to.
After all, our salaries are the biggest determinant of how much money we can save – and how quickly we can hit the magic number.
The Common (Wo)Man
One alternative explanation for the rise in compensation at the top ranks is the implicit need to incentivize the line troops.
The thinking goes as follows: in addition to our current compensation, the promise of future pay forms an equally important part of the incentive structure.
You may be making 30k today, your manager tells you. Yes, it’s not as much as some of your friends are making in less glamorous roles or companies.
But keep putting in the hard work, and you will rise.
Loyalty and effort will be rewarded. One day, you will look out the window of your corner office and say: it’s all been worthwhile.
Of course, us worker bees aren’t that naïve. We listen to the siren song, look up the ladder and ask ourselves: what are the chances of ever rising so high?
Having assigned a probability of making it to the senior ranks, we then come up with an expected value of sorts.
If you know you’ve only got a 1% chance of ever making it to the top, a multi-million executive compensation package could make the game worth the effort.
Alternatively, if the prize isn’t that appealing, you will simply decide to clock your nine-to-five. Why waste time?
Much better to use the free hours picking up a side hustle, perfecting a skill that will help you make more money in your next job, or (gasp!) living life.
And this, of course, is hardly an outcome your employer desires.
Playing The Lottery
In a way, the setup at work isn’t that different from heading into your local convenience store and buying a lotto ticket.
You know the chances of winning are miniscule. You are not paying for a chance to win a pot of gold. Instead, you are handing over your hard-earned money for the right to dream.
For just a few hours, you get to imagine what life will be like if you do win. Then, of course, the winners are announced, leaving you to wait for the next dopamine shot.
There’s nothing wrong with playing the lottery. The amounts involved are (hopefully) miniscule, and the fact that the emotion is fleeting doesn’t make it any less valuable.
Unfortunately, the same logic doesn’t apply to our jobs and careers.
Nothing wrong with dreaming of that C-suite position and executive compensation package. But spending a third of our lives playing the workplace lottery is hardly the way to maximize the monetary rewards.
The Gig Economy
Back in pre-Covid days (remember those?), I would normally travel at least a few times a week. Naturally, that involved more than a few interactions with Uber drivers.
Back when Uber was taking a lot of heat for the way it treats its workers, I often made a point of asking the drivers how they felt about their jobs. Nothing like a first-hand perspective to counterbalance the inevitable filter of the mass media.
Surprisingly, the drivers I have spoken to were unequivocally positive about their employment. It was certainly at odds with the mainstream narrative that demonized the gig economy.
Many drivers would tell me they left other jobs to take up driving. Others would drive alongside running a small business.
Time and again, I would hear stories of being able to choose your own hours. Doing the school runs. Taking a few hours off in the afternoon to do homework with their kids. Being able to leave work behind when the app is off.
This isn’t a post about the merits and drawbacks of the gig economy. There are far smarter people (with more time on their hands) that can dig into that meaty topic.
And no, I’m not encouraging you to rush for the door and sign up for a gig role either (though it may be an excellent ways to make extra cash).
But the one thing that reflects well on the gig economy business model is that it doesn’t make any (mis)representations about the future. The effort-for-money trade-off is clear.
No fancy titles, meaningless promotions, and questionable perks. Just cold, hard cash. And our employers could take a cue.
Fruits Of Our Labour
In the never-ending capital-versus-labour tug of war, our affiliations change over time.
When just starting out, labour forms the bulk of the value-add we bring to the table. As such, it’s only natural to desire that labour captures an outsized portion of the returns.
Progressing up the wealth ladder shifts the balance. Assuming you’ve invested your savings in the stock market, you’ve now joined the ranks of shareholders. In other words, you are providing capital to enterprises.
Naturally, you should want capital to capture an outsize portion of whatever economic value is produced by those enterprises. Pay the employees less – and leave more for the shareholders.
Incidentally, this may also explain why most people gravitate towards the political right as they get older.
The other dynamic that plays out as we age is that we inevitably become more jaded.
We realize that fancy titles don’t really matter – unless you can monetize them when you switch jobs. That for the vast majority of us, the promise of entering the executive ranks never materializes.
And that free time suddenly becomes so much more valuable as you have children. Can’t hug the corner office before you go to bed.
If this blog ever gets big enough, chances are that one of the readers may well become a Fortune 500 CEO, with an outrageous comp package to boot.
Everyone else should treat the promise of entering top management as just that. If it happens – great.
In the meantime, might as well solve for cold, hard cash today – and treat everything else as mere noise.
About Banker On Fire
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Banker On FIRE is a London-based M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.
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