Intellectual dishonesty in corporate America, CEO Salaries

Apparently CEOs are upset that the Security and Exchange Commission is going to require calculation of CEO pay based upon median salary of all employees rather than Mean or average. They argue that this would burden them with unnecessarily complex calculations. This of course is an absurd statement. Let’s do a thought experiment to walk through the difference between averages and medians.

You, a friend and Bill Gates get on an elevator, your current net worth is $100,000, your friend’s is $200,000 while Bill Gates is somewhere near $60 Billion. The average net worth of the three of you would be $20 billion, while the median is $200,000.  The difference in ratio between these examples are staggering. In the example of averages, Bill Gates is only 3:1, while in the second example it’s 300,000:1. Major difference correct? This example is specifically designed to highlight the massiveness of the differences between averages and medians.

As you can see in the chart above with a skewed distribution there will be a gap between the median and mean. We hear this routinely when people discuss home prices, they are always discussed in medians, because the average price of a home is positively skewed by millionaires in most cities. Like the one above.
So what would the difference in salaries be if salaries are calculated off of median rather than means? Well, let’s use some real numbers, in 2004 the US the average annual income was: $60,528 while the median was $43,318 (source wikipedia). We’ll look at the extremes for ratio difference compared to these numbers, the JC Penny CEO earned 1795:1 the mean worker, so his salary could have been: $108,647,760 for the Mean compared to $77,755,810 or $31 million less (obviously the mean and median salaries for JC Penny’s employees are lower than the median or mean values for the US). On the lower end the CEO for Agilent Technologies earn a measly 173:1 or (mean) $10,471,344; (median) $7,494,014 or $3 Million more. 
Limiting CEO salaries based on the median means dramatically less money for the CEO. It also highlights disparity in numbers of people that are making really low salaries. I would imagine that for a company like McDonald’s or Wal-Mart the median salary for employees is between 20-30k/year, which would drive down the maximum salary well down if the limit is something like a ratio of 100 (median of 25k*100 = 2,500,000). 
The true concern of the complexity comes from not the new method of calculating the maximum ratio a CEO can earn using medians – especially as it’s built into excel (=average()/=median() ) and nearly all financial tools, but in the complexity of creating compensation packages to get around that law. If the law is strictly implemented where there is absolutely no wiggle room where all stock options, bonuses, and base salary cannot be above some set ratio on the median salary, then the only way to pay CEO’s more is to shift that median up. This would impact profits and most likely profit margins. A way around this would be to outsource manufacturing and exclusively design in the US thus shifting up median salaries. It will be interesting to see how CEOs and leadership address this.
Otherwise they might have to make a lot less money per year and save shareholders a lot of money.

How you feel at work

We know that work sucks most of the time. The question is why? My wife and I have been pondering this question quite a bit lately because of her high levels of stress. She’s basically working all the time and has little expectation of being rewarded beyond a raise and the yearly bonus everyone gets based on the performance of her company. Being on call 24/7 with tools that consistently go down as a new employee immediately creates problems. No matter what you do you feel like you’re a failure. This is where the quality of your manager can really step in to make you feel better about the job you’ve been doing. According to a Danish study this is what causes work driven depression, not the amount of work you’ve left to do. I completely agree with this. I know that I’ve gotten depressed when I’ve had minimal work to do and had been successful with my work because I had a bad manager (he was giving raises to the women in the group he obviously had a crush on). When your managers have poker faces and basically treat you the way they expect to be treated, no awards, recognition, and more work with less time for a job well done are causes of serious workplace depression.

The article doesn’t really provide many ways to address these problems. However, from my experience I know that there are some definite ways to address this type of depression. First, look for co-workers that inspire you and can motivate you. Get peer recognition and make sure you recognize your peers that you feel are doing exemplary work. In many cases companies have spot awards – use them regardless if there’s money associated or not. The recognition really makes people feel good. Furthermore, as more of your peers begin to show recognition it will actually put pressure UP to your manager to do the same. The manager will be the aberration of the group and will likely want to conform, especially if manager sees improvement in the organization.

Work with cross-functional teams. You are more likely to get rewarded when you work on projects with larger scopes. This provides several benefits for you, first you learn more about the organization than just your silo. Second, you are able to see how other leaders treat their people and if you like how a leader in a different group treats their people, you should consider moving in that direction. This will enable you to develop new skills and potentially learn the skills you need to get into a job you find more interesting and full filling.

Finally, if you don’t find something that makes you happy at the company you’re with leave. Not without another job lined up, but start looking for the types of jobs that you want and try to find out what type of manager you’d rather work for. In many jobs you can move around enough to learn what you like and what you don’t like. I suggest moving around within a company, then looking elsewhere. Develop the skills you can while you’re at your current job and try to find something you’re excited about.

Many of the people I’m connected with on social media, such as the KBMOD crew have been able to do this, but not all of them have been able to. I hope they’re able to do this soon, I know that my wife will be doing the same over the next few months. Work takes up too much of your life for it to suck that badly. Move on, if you had a failing review a company would do the same with you, why shouldn’t you do the same if you’re company’s failing you?

Government Shut Down

The government shut down is bad mmmkay? This is one of the examples as to why I’m glad my wife didn’t end up with a job at either a government research lab, government agency, university or any other place that relies on public funds to keep it’s doors open. That’s a lot of places. Between the sequestration and this shutdown, the US has turned into a horrible place for the sciences. However, it’s alright for us to keep the NSA up and running, but not the people that watch the watchmen. Basically, our government has different priories than most Americans, which of course is no surprise – well at least different from myself. Losing funding for science is a huge blow, especially the fact that they couldn’t continue to speak or publish any papers. It’s disconcerting because our scientific research is what allows the US to stay ahead of the rest of the world in our economic output. The results of scientific funding from the ’60s essentially gave rise to everything we’re doing on the internet. The funding from ARPA that lead to ARPAnet and then the internet, inadvertently lead to the great work I mentioned in my review of Dealers of Lightning. Many of the members of the team at Xerox were funded by ARPA during their PhD’s, their research at various universities, and in some cases even startups. This one government expenditure had massive positive impact in the one area of our economy that’s going gang busters.

So what’s going on with this shutdown? As this article points out the House did pass a budget, which is where all budget must start, however, the Senate didn’t pass it and countered with their own budget, which happens fairly often. This leads to negotiation between the two chambers in Congress. The problem that we’re experiencing in this case is that the “don’t match” portion happens to be Obamacare. The House did not fund Obamacare at all, while the Senate naturally did (being held by the Democrats). This required that the House and Senate come together to reconcile their differences, which aren’t possible to reconcile with everyone. Which is the Speaker’s problem right now. Almost a week ago, there were rumored to be enough votes in the House to pass the Senate version of the budget – as Republicans were defecting to support the Democrats. The House refused to allow a vote to be called. Bills that don’t have a chance to pass get votes all the time (many people have pointed out Obamacare repeal is a key example of that). So, I think that the article I linked above is a bit disingenuous either intentionally or is just intellectually dishonest. The author clearly knows what people mean by saying “law of the land.” It means that as we have obligation within the law we need to pay them. The House, Senate, President, and Supreme Court weighed in and it’s a legal bill. The House is unable to repeal it through legislative methods so created a plan to shutdown the government to stop the bill from taking effect – to defund the bill and “repeal” it that way. That’s what they are doing and why.

The reasons for why the Republicans believe this would work is beautifully laid out in an argument using Game Theory on the Harvard Business Review: every other time brinkmanship was used, it worked. Go with the strategy until it doesn’t work any more. The White House figured this out too and now cannot allow it to continue. Otherwise, the above author would be correct, the best way to kill a bill you don’t like that passed through everything is to simply defund it later or shutdown the government until the other people meet your demands. Toss some spin on their to make it seem like the other side is unreasonable and boom, you’ve gotten your way again.

The problem with brinkmanship is that it’s a zero sum game and if the government defaults, it’s going to be terrible for everyone. The bulk of US voters blame the republicans, this could cause massive damage to even safe areas for the republicans. Are there better ways to deal with Obamacare? Yes, if it’s as awful as the Republicans think it is, use that to get everyone out of office that voted for it. Run on that plank and push it to the hilt. If it kills jobs, causes people to go bankrupt use all that to get the Democrats out of office. Then once a majority is secured repeal the law. That’s how government should work. Sure you can work to undermine the law while you’re at it, but if you want to get rid of it, do it with votes so it’s clear the people have spoken. This shut down is bad for everyone. Let’s end it, figure out how to address long term debt, improve the job market, pay for more science, and address the structural problems we have as a nation. If Obamacare is a bad thing, we’ll figure it out really quick and then deal with that fall out. We need leaders now, not children.

New Economy vs. Old Economy – Creative Destruction

My last post on this the New Vs. Old triggered a far to brief conversation at work about creative destruction and when it’s “right” for creative destruction to occur. I felt that this was an interesting tact for approaching this sort of conversation. My colleague pointed out that when new businesses challenge laws that are in place just because you have to question if that’s “right” or not.

First, what is creative destruction? I wrote about this over two years ago, so I’ll forgive you not remembering. Essentially, it’s whenever new businesses figure out new innovative ways to provide a service or technology that causes the previous service to be obsolete. Today, it’s more popularly described as “disrupting a market.”

So, looking at creative destruction and the laws that spring up around a given industry I believe that on the extreme there are only two types of laws. Those that protect the consumer/public/end user/employee and those that protect the industry. That’s not to say that this isn’t a gradient where the impact of a given law flows from protecting the public to the industry or in fact does both.

For example, Copyright used to protect both the people that produce music and the public. It did this by guaranteeing a state sanctioned monopoly for a short time period and upon expiration the public would then own the work. This enable the creation of the music industry and helped artists grow and make money. It wasn’t perfect for either party, but it worked fairly well. We all know of stories of starving artists that died and then their works became popular. Well, currently those works still make someone money and that isn’t good for the public. Now copyright lasts as long as 70 years past the death of the original artist. This clearly is no longer protecting the public but is protecting the industry. I would argue that with how far the pendulum has shifted it’d be moral to try to push the boundaries of these laws and creatively destroy the industry. This is currently happening with the copyleft movement.

In the last blog I wrote about AirBnB and discussed Uber in the one before that. These are very different than the music industry. Most cab companies have something called a medallion, which is something like a certification of quality for the vehicle and the cab driver. These are very expensive and have essentially a dual function of protecting both the public and the taxi industry. Uber is challenging these laws because it is a “ride sharing” program where you hail a person going in the direction you are, pay them some money and move on. The purpose of the company is to reduce expense of moving around a big city like San Francisco, increase the competition of the market, reduce the number of cars on the road, and to make money a different way. Depending on your point of view it’s breaking the law. It’s being sued and will likely continue to be sued.

Is it “right” for this company to operate this way? Well, there’s the argument that you don’t have to use Uber at all, so if you’re concerned about the safety aspect you’re mostly covered. Since it’s a personal vehicle the general public is at no more risk than if the car was driving around with one person rather than two. The person is already on the road and likely would have been anyway, so if they suck at driving you’re no more or less safe. However, it’s still possibly in conflict with the law. It’s a new way to hail a “cab” and the taxi companies are having problems adapting to the competition. So is it right or wrong? In this case, I don’t really know. I think that it’s “Right” that a company is forcing taxi companies to evaluate how they do business and to challenge the laws that are in place to protect the taxi industry. I think there could be risks to the public, but they aren’t huge.

There’s another aspect that I haven’t talked about in this model though. A company like Yellow cab has subsidiaries in many different cities. While Uber is an application and it’s “cabs” are in any city where a person is a member. There’s a huge network effect benefit for Uber, they need to do little to no extra work and they can grow into new markets. Uber doesn’t control which markets they enter to some extent or how quickly they grow in a given market, they can grow as fast as the market can support the growth. Yellow Cab has a much different growth potential and can’t enter new markets as easily. If Uber is able to service an under serviced area shouldn’t we support that? Isn’t that “right.” Furthermore, with this rapid growth model it’s nearly impossible to know what laws they are going to be in conflict with until it’s already in the market. Ignorance of course is no defense, but it removes some of the intentional aspects of the creative destruction.

I think that there are certainly moral questions that need to be asked around new businesses and business models. We should continue to ask them and work to make sure that if a new company is disrupting and industry the result is equal or greater protection to the public and a balance between changing laws that protect incumbent industry and the new entrant.

Review: Dealers of Lightning Story of Xerox PARC

This is the Third historical book written about a business. The first was the history of Bell Labs and compared to that book, this was a wild ride in terms of organization. It would bounce back and forth over the span of ten years, while Idea Factory (Bell Labs book) was a stately possession moving forward with time. I believe that the major difference was that while a lot was happening at Bell Labs, it wasn’t crammed into 10 years. It occurred over 40 years or more, which allowed the author to pick and choose the people to follow. In Dealers of Lightning so much was happening at the same time with the same people and unique people that it forced the author to jump backwards and forwards through time.

Despite that, it really made me realize how much we owe to PARC researchers in the 70’s for technology we have today. If you’re using a tablet, one of the very first visionaries that created that concept was Alan Kay, he first envisioned it in the 60’s and from what was described in the book, the iPad is pretty much true to his vision. Amazing to be honest.

Here’s a list of things they made:
Object Oriented Programming
Ethernet
The First mass produced PC
The predecessor to Word
The original Desktop
VLSI, what has enabled the development of basically every semiconductor chip
The first Graphics Chip
Copy, Cut, and Paste
The right click
First Laser Printer
The predecessor to Postscript (Adobe)
A piece of software where you could edit text and pictures at the same time
A computer in 1982 that had 6000 Japanese characters and could type in 100+ languages and it’s capabilities wouldn’t be match again until the 90’s

Dramatically influenced Apple, Microsoft, 3Com (Metcalfe founded this after leaving PARC), Adobe (2 PARC researchers founded this), and many other companies.

Xerox was a visionary company to fund a research agency like PARC. PARC was likely one of the last of its kind as well. There are very few companies that have a similar branch of research facilities that push basic and applied scientific research. I suggest reading this book, just so it helps you understand where the technology we all use and love came from.

I give this book 4/5. Well researched, great topic, difficult to write because of the concurrent activities.

New Economy vs. Old Economy – where the future is going

Yesterday I posted an article about AirBnB focusing on how it’s upsetting entrenched businesses, neighbors, and has attracted the attention of the NYC AG. I had intended on having a much longer discussion but ended up going down the rabbit hole with that topic. I was influenced to do that article by an article in CS Monitor about the growing backlash against the sharing economy. That article did discuss AirBnB, Uber, and a few other sites. I suggest reading it.

While that article focused on the sharing economy, there’s quite a few other companies that are causing problems for entrenched businesses because of the way they’ve structured their businesses. One of the most prominent companies doing this is Tesla Motors. Tesla has upset a just about every single car dealer in the US. Why? Well, as an attempt to encourage growth of multiple types of car companies the US and many states forced a separation between car dealerships and the manufacturer of the cars. This has worked extremely well for car manufacturers because they are able to push cars to the dealers and the dealers can get them for a discounted price and then sell them to their customers. The US is pretty unique in this approach – it’s why there’s those megadealers all over the place. Tesla is more closely modeling their distribution network off of Toyota where they build a customer for life and build to order. Toyota in Japan is so flexible they can meet an order and have it delivered within a week. Tesla has decided to have “showrooms” where people can look at the car try it out, but they can’t buy it. They have to order it online. Car dealerships are pushing for legislation and suing Tesla over this. I believe that Tesla’s model will work for many consumers but not all. It should be interesting to see how this plays out.

Another area that’s interesting is Twitch.tv, which has turned watching your friend play a video game into the next big thing that ESPN already missed out on. For those unaware, Twitch allows people to stream themselves playing video games and interact with their viewers directly by reading chat and talking to the chat or typing back to the viewers. Through this, games like League of Legends, StarCraft, DOTA, Street Fighter, and first person shooters has turned into a $20 million dollar industry just for tournaments. It’s replacing how people watch “TV” and engage with the people that are watching. These tournaments are pulling 200,000 viewers on just about any given weekend with several thousand in person to watch the event. Each game type has their own celebrities, heroes and villains. It’s still early, but it is going to pull people away from cable and from watching ESPN. I would not be surprised if ESPN began to show some of these events. It might take a few more years, but it’s going to happen.

Finally, the other interesting area where the new economy is threatening the old economy is the Silk Road. The Silk Road was an online blackmarket that used Bit Coins as it’s only accepted currency. It was wildly successful before its owner was recently arrested with approximately $80 million in BitCoin or about 5% of the total currency in circulation. This is the cut that this person made, which means it’s likely that hundreds of millions of dollars flowed through the site selling drugs and other material. With it’s collapse this market is likely to follow a similar path as the music pirating industry. Effectively there will be more security, less people will know what the Silk Road’s replacement is (I heard about Silk Road about 6 months ago) and it might be more dangerous to use. From all reports Silk Road was relatively safe to buy drugs from as the drugs were simply mailed to the user and it cut out the distribution channel where a bulk of the violence occurs.

I think that these types of business models will likely continue to flourish, it’s likely that we’ll see a lot of new types of business models that build upon this. I’m interested in seeing what’s going to happen.

New economy vs. old economy

With the rise of the so-called “Sharing Culture” there’s been a recent upswing in the types of business that focus on connecting people point to point with others that can provide services that people need without a lot of the fuss of other intermediaries. There are, of course, a few pioneers in this type of activity, Napster, Kazaa, but also more “Legitimate” companies, such as eBay, PayPal, and Craigslist. These caused disruption, but not on a seriously massive level. eBay expanded the amount of people that could or would auction off their goods. It more likely impacted the amount of garage sales or donations to Goodwill. Craigslist did have a negative impact on newspaper’s income – however newspapers were having other issues because people just weren’t buying them, so it was somewhat moot. Now, however, there are companies springing up that are impacting much larger less “fringe” portions of our economy.

I first heard of companies like this while in the Netherlands where some of my friends were using Couchsurfing. Which connected people that were passing through an area for a night to two to crash on someone’s couch. I don’t think any money was exchanging hands. I believe that this site was a natural precursor for AirBnB, which has gotten in a lot of hot water lately. This site, for those unaware, allows people to rent out rooms of their house or their entire house for short periods of time. The idea is that the renters can use the stuff in the house and have a cheaper place to stay compared to a hotel. While the owners are able to rent out unused space. For instance, I could rent out my third bedroom if I wanted too.

A lot of people aren’t happy with this notion. For one, it does violate a lot of zoning laws and people are pissed about their neighbors renting out rooms to god knows who. Secondly, it does violate those laws and New York City has decided to do something about that. They’ve asked for information on 15k users in the city. This will likely be a large blow to membership there. If users feel that they are likely to be hit by a law suit or forced to pay licenses to rent out the rooms, renting the rooms will be much less appealing. This of course will thrill hotels as they can continue to enjoy a higher cost.

Part of this stems from the fact that this is new and scary. People don’t understand the change. Part of it comes from the fact that the city doesn’t want people to do this instead of normal rental agreements which “protect” both parties in different ways. An AirBnB arrangement is very different and likely has a lower level of protection (mostly social norm based rather than legal based). Part of it probably has to do with money. The city likely earns less taxes from people renting rooms this way than from Hotels.

These types of differences are going to be occurring on a more frequent basis. We need to help steer the conversation as internet savvy folks and look into how we can create accommodations for both sides. I’m not saying for the hotels, I’m talking about for your neighbors and community. Work with them to help them explain what’s happening, why it’s happening, and what they can do to help develop the social norms for websites like AirBnB rather than destroying it before it has a chance to be successful.

I’m hoping there will be a lot more experimentation in these types of sites even if I never use them. I firmly believe that it’s your house you should be able to use it as you see fit as long as it doesn’t cause harm to other people. Having a two way conversation and educating the different stakeholders involved is crucial to ensuring the survival and continued experimentation in these spaces.