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  • Why Corporate Executives Get the Big Bucks

    Posted by Shannon Love on October 5th, 2010 (All posts by )

    Note: I wrote an overly long comment on this thread at Hit&Run, so I thought I would post it here. The thread was about a Reason debate on executive compensation, why it was so “high” and what could or should be done about it. The tone is snarky because a lot of people on the thread were being silly.

    Okay, children, let me explain why executive compensation is so high. Are you ready?

    Ahem: If you want someone to run your company for your interest you have to pay them more than they could make running their own company for their own interest!

    Admittedly, this a concept as complicated as quantum physics for some people but I will try to boil it down.

    If someone has what it takes to run a major corporation, they have what it takes to run their own business. If someone has what it takes to convince a bunch of investors to hire that person to run the investors’ business, they have what it takes to convince a bunch of investors to invest in that person’s private company.

    High executive salaries trace back to investor groups buying private companies and then paying the original owner big bucks to stay around and manage.

    The reason that American executives continue to pull down so much dough relative to the rest of the world is that in America you can walk out the door, start your own business and rise to the top of an industry. You can’t do that in corporatist systems like those in Europe, because the state protects large corporations from internal and external competition. It is much, much more difficult to grow a business into a giant in Europe than in American. That lack of freedom reduces the choices of executives and keeps executive compensation down.

    If you want to live in a country where executive pay is low, you have to live in a country like France where the top 30 biggest companies in 1970 are still the top 30 biggest companies today. In America, 20 of the top 30 companies today didn’t even exist in 1970. As long as small companies are allowed to succeed big and big companies are allowed to fail, you will have high executive pay.

    And yes, having the right executives matters, it matters big-time. People who think otherwise usually operate from a crypto-Marxist assumption that companies churn along on autopilot driven by natural forces and it doesn’t matter much who sits at the top. That’s abstract nonsense. No one can wreck a company faster than bad executives, and often all it takes to turn a failing company around is a change of management.

    A clear example of this is Steve Jobs an Apple. Jobs is still the proportionally highest-compensated CEO in the world and Apple’s stockholders, employees and customers think he is worth every damn penny. I was at Apple back in the ’90s and watched two different CEOs drive the company into the ground and one CEO staunch the bleeding, but it took the unique talents of Jobs to make the company a success again. He might have been the only person in the world capable of doing so.

    Without Jobs there would be no Apple. His value to the company is literally almost the entire theoretical value of the company. When his health problems were revealed, Apple’s stock tanked.

    Jobs is but the most visible and extreme example of executive talent out there. There are tens of thousands of absolutely vital executives toiling away in obscurity. We have no better mechanism for choosing executives and establishing pay than the one we have right now.

    Some people say that laws governing corporations have created too little feedback from stockholders on executive selection and pay. Perhaps so. In that case, the cure is to get rid of the laws and let private contracts settle matters.

    When the government interferes in the management of publicly traded companies, it almost always has the effect of giving a significant advantage to privately held companies. That is what happened with Sarbanes-Oxley. If publicly traded companies can’t hire the best talent, then privately held companies will. The effect will be to reduce corporate ownership from 50% of all Americans to just a tiny subset of the population.

    That is the exact opposite of what those who want to regulate executive pay claim they want to happen.

     

    31 Responses to “Why Corporate Executives Get the Big Bucks”

    1. Dexter Trask Says:

      I broadly agree, Shannon. However, your analysis only looks at the demand side; I think that the supply side informs this discussion as well. When a public company is looking for a new CEO, they must generally do so quickly and discreetly. This gives the CEO candidate being wooed by the board of the company a tremendous amount of leverage in negotiating his or her compensation package. As with most transactions where one party has more information than the other, the party with less information (and fewer options) pays more than an efficient market would demand.

    2. David Foster Says:

      Interesting analysis. I’d observe that if you compare executive salaries with top-tier entertainers and athletes…indeed, with college football and basketball coaches…they suddenly don’t look so high.

    3. cjm Says:

      here’s where your thesis runs off the rails:

      “If someone has what it takes to run a major corporation, they have what it takes to run their own business.”

      I’ll leave it as an exercise for the reader to explain why that statement is nonsense.

    4. renminbi Says:

      Sarbanes-Oxley. Listening to Sarbanes on C-Span he was obviously quite intelligent,unlike almost all of his colleagues;clearly he should have seen the folly of this. The problem with government is that the ones who aren’t stupid are looking out for themselves by a wide margin.

    5. Shannon Love Says:

      CJM,

      I’ll leave it as an exercise for the reader to explain why that statement is nonsense.

      Funny, given that (1) many executives currently running businesses started those businesses from scratch and (2) many executives leave to start their own businesses and (3) many boards high executives with previous entrepreneurial experiences.

      Let me guess, your one of those people who know nothing about high level business except for the relatively limited number of high profile failures.

    6. Multitude Says:

      Perhaps gradations of this analysis are relevant, as some criticisms are clearly getting confused in equating a Fortune 500 CEO’s capabilities with a start-up of a Subway franchise.

      As one who successfully launched three startups and now runs enterprise risk for a global Fortune 250, I’m confident in two of the past three CEOs capabilities to run startups in the post-seed capital stage. I wouldn’t expect them to be interested in incubator stage plays given the size and complexity of the play simply isn’t interesting. That’s actually what brought me from startup CEO to global corporation risk executive — more complicated problems that keep me engaged and allow me to do things most others globally in the theorization and practicing of risk management simply don’t have the opportunity to do.

      So in this respect, I concur that the CEO pay is a partial compensation for opportunity cost from early stage startup ventures. Nassim Taleb speaks to a second factor in The Black Swan (easy text on non-gaussian risk): very limited supply and open-ended price offers on the demand side for those who can handle the extreme velocity, complexity and accountability of a global corporation. It’s no different than why the top NBA players make tens of millions a year while a secondary league player makes less than a first year high school teacher. When owners have a multi-billion dollar corporation that can be readily crashed or severely damaged by inept management, the pool of capable executives that can lead such complex, extreme velocity plays is miniscule.

      I say this as one who both lead three startups successfully as CEO and who works with close proximity with C-level management today, fully realizing I do not have what it takes to head a $5 billion+ global firm (nor do I want the 200+ travel day schedule). Reduce that population of capable candidates with actually successful ones, and limit that further to those who have management orientations that resonate with the strategic needs of the respective business entity (e.g. sustain, transform, etc. modes), and you end up with a condition where the talent can pretty much name its price.

      Please don’t construe this as a defense of ineffective leadership, which too frequently receives excessive compensation, exit packages and other gifts that are highly problematic. Nor should this explanation be intended as a justification of this market condition; those are debates that engage normative analysis not relevant to a phenomenon emergent from market dynamics.

    7. Blake Says:

      Shannon,

      Another faucet of CEO compensation is this: While CEO compensation is high compared to the average worker, the aggregate wage the CEO is responsible for tends to be much higher than his or her pay.

    8. cjm Says:

      being able to *start* a successful company is a very valuable and rare skill. those capable of it are certainly worth paying for.

      so the last ceo of GM was worth his pay? how about bernie ebers, or ken lay? or are we cherry picking our data?

      how many ceo’s are genuinely valuable, and how many are like the tax eaters devouring our economy?

      once a company is mature, running it is a pro forma activity. 99% of ceo’s are interchangeable with anyone that reports to them.

      sorry to make you so snippy, but this is a weak article compared to your usual standards. the tone is juvenile and the premise is facile.

    9. cjm Says:

      one more thing, regarding your reply: the use of “many” is the give away that you just pulled this thesis out of your cat’s ass. put some real numbers in and you might persuade someone. also “high leve business” is a term a tv writer would use, not a serious writer.

    10. Brett_McS Says:

      “…once a company is mature, running it is a pro forma activity” provided that a scheme of political patronage protects it from dynamic competitors and new upstarts. But we don’t want that sort of system, do we?

    11. Blue State progressive Says:

      So in this respect, I concur that the CEO pay is a partial compensation for opportunity cost from early stage startup ventures. Nassim Taleb speaks to a second factor in The Black Swan (easy text on non-gaussian risk): very limited supply and open-ended price offers on the demand side for those who can handle the extreme velocity, complexity and accountability of a global corporation.

      Dood stop it you’re making my head spin…

    12. Engineer Says:

      99% of ceo’s are interchangeable with anyone that reports to them.

      This is ridiculous.

      In the technology industries the examples of Jobs or Gates vs. Ballmer are illustrative and not exceptional.

      In every technology company there are fundamental strategic disagreements among senior executives. Which customers are strategic, which emerging technologies are likely to succeed etc.

    13. David Foster Says:

      In a large and complex company, the time constant for decision outcomes is longer, especially in a “mature” industry. If a mediocre CEO had been appointed to run Apple last time around, instead of Steve Jobs, the company probably would have flamed out within 2 or 3 years. In the case of General Electric, OTOH, it probably takes a minimum of 10 years before a CEO can be fairly evaluated. But the longer time constant in the larger organization doesn’t mean the leadership isn’t equally important.

    14. cjm Says:

      when you are using Steve Jobs or Bill Gates to prove a general case, you are not actually making the point you think you are. but thank you for making *my* case :)

    15. Bruno Behrend Says:

      I haven’t read all of your thesis, but remain convinced that CEO pay is inflated, and “marquis” CEOs are no more qualified than literally hundreds of people willing to work for less.

      It’s rarefied air up there, and the process is far less of an market than another insider’s game.

      I’ve read enough in the press and heard enough from people inside these organizations to know that CEO pay is a function of friends on the board, hiring Hewitt or some consultant to spike pay, and the same “good ole boy” network than it is an honest competition for talent.

      I lack the time to prove my case in its entirety here, so I’m sure the dogmatic libertarians will jump down my throat and call me a rank populist. This will warm my heart, as most of them are positing the myth of “shareholder maximizing” board operating in an open and transparent market.

      Today’s search for marquis CEOs (for the F500 companies) is much closer to the dance of the lemons that takes place for school district superintendents than it is a pristine and moral search for the cream of the crop.

      In closing, let me say that my view does not support, nor do I support, any regulation of CEO pay. If companies want to destroy themselves hiring morons like “Chainsaw Al” or incompetents like the woman who rode a trail of bankruptcies to the CFO of a giant insurance broker, they should be free to do so. The fact that these people even have jobs undermines Shannon’s thesis.

    16. David Foster Says:

      Even established companies in “mature” industries are not immune from competition. Newspapers were considered a mature industry: ask Pinch Sulzberger how he feels about that now. IBM enjoyed strong dominance in the mainframe computer industry: its world started falling apart circa 1990. It has survived and is doing relatively well, but if someone other than Louis Gerstner had been selected to run the company, things might have been different. Xerox was long considered a dominant force in the office equipment industry: it almost declared Chapter 11 bankruptcy, and only the committment and leadership of Anne Mulcahy kept that from happening.

      In the military, it’s sometimes said that the good peacetime generals often have to be replaced once the shooting starts. The same principle is often applicable in business.

    17. David Foster Says:

      Re the assertion that most CEOs can be replaced by any of their direct reports: an important part of the CEO’s job is the selection and development of people. If the man or woman running the company has been there for some time, and has several subordinates capable of replacing him or her, that actually speaks very well for his/her performance.

      This is easier to be, btw, in a company that is “federally decentralized” (Drucker’s term) into true business units than in one which is functionally organized (sales, manufacturing, engineering, etc) since subordinates gain actual *business* experience rather than only *functional* experience.

    18. shannon Love Says:

      cjm,

      …this is a weak article compared to your usual standards. the tone is juvenile and the premise is facile.

      The tone is more snarky than I usually write and that is why I put the disclaimer at the top.

      My primary point is one you don’t address: Everyone from the janitor to the CEO has the option of at least trying to work for themselves. More importantly, while there is a big difference in the skills and aptitude between people who work for wages and people who can startup their own business, there is difference between running a publicly traded company and running a privately held one. That means there is greater competition with self-employement in hiring executives than in hiring the janitor.

      once a company is mature, running it is a pro forma activity. 99% of ceo’s are interchangeable with anyone that reports to them.

      That is crypto-marxist nonsense that, were it true would falsify your own argument about the CEOs of failed companies. After all, if a CEO has no role in making a company healthy and profitable, how can they have a role in wrecking it? You can’t logically argue both ways.

      You just seem irrationally bigoted against executives. When the company does well, they had nothing to with it and when it tanks, it is all their fault and they should receive nothing. Make up your mind.

      so the last ceo of GM was worth his pay? how about bernie ebers, or ken lay? or are we cherry picking our data?

      Well,Bernie Ebers and Ken Lay were criminals who defrauded the owners of the companies they worked for and they received nothing but jail time.

      As for GM, how do we collectively decide when a CEO has failed so badly that he deserves no pay? Companies die naturally. In many cases, the goods or services produced by the company are rendered obsolete by changing technology and conditions. The company is doomed. In fact, there are people who specialize in winding down companies. If the patient dies, is the doctor always at fault?

      More importantly in cases like GM, how do apportion blame? After all, its not just GM that is in trouble but the entire American auto industry. Obviously, there are important factors outside of executive control. Indeed, I think we can all agree that no executives have as little control over their own companies as do automotive execs. The union interference beyond pay issues in company decisions is obvious and well documented but he government interference is major but poorly understood by most.

      For example, GM is the best manufacture, world wide of heavier vehicles: big cars, vans, SUVs, pickups and commercial vehicles. When faced with competition from Asian imports, the best thing for GM to have done was to decide specialize in the types of vehicles they had a competitive advantage in building.

      However, federal law makes this de facto illegal. The Corporate Average Fuel Economy (CAFE) standards require that a companies total average fuel efficiency fall below a certain target. That means that while a company can specialize in building small cars, no company can specialize in building large vehicles because it is technologically impossible to hit the CAFE standards without selling a certain percentage of small, lightweight, full efficient cars. That has forced GM to attempt to build cars it doesn’t know how to build or spend vast amounts of revenue buying small cars from Asian manufactures.

      when you are using Steve Jobs or Bill Gates to prove a general case, you are not actually making the point you think you are. but thank you for making *my* case :)

      Well, I identified Jobs as an outlier but clearly he proves my general point: A CEO can make the difference between the success and failure of a company and thus his hiring and pay might be the most important decisions made by the owners. It follows that for every outlier like Jobs, there must a much larger population of executives who while not so irreplaceable , nevertheless strongly influence the health of their companies and are justified in their pay.

      Just because you blithely assert like a good little Marxist that 99% of all executive do nothing, that is not evidence. All it proves that you have zero experience in business.

    19. shannon Love Says:

      Bruno Behrend,

      I’ve read enough in the press and heard enough from people inside these organizations to know that CEO pay is a function of friends on the board, hiring Hewitt or some consultant to spike pay, and the same “good ole boy” network than it is an honest competition for talent.

      Yeah, a lot of people say that but no one can quantify it. No doubt “good ole boy” networks have some effect, after all it certainly does in every other type of job but nobody can measure the degree of the effect in the least. Since it is impossible to discern an executive’s worth prior to hiring them and having them attempt to run the company, how can you possibly determine how over or underpaid they are?

      On the other hand, we do know there is strong economic pressure from the owners of companies, even in publicly traded companies, to keep all labor cost down. Why would thousands of company owners not pay attention to millions of dollars in wasted executive compensation? It all well and good to say that like hires like but frankly with millions and sometimes billions of dollars in corporate profits on the line, “Let’s hire Jim, we were in the same frat,” doesn’t carry as much weight as you might think. So, even though the effect no doubt exist, it is so small that it isn’t worth stockholders time and money to try and reduce it further.

      Also, if all this back scratching was a significant driver of executive pay, we would expect privately held companies to pay considerably less when in fact they pay a bit more in cash because they can reward with stock. That indicates that the market is the primary setter of executive pay.

      This will warm my heart, as most of them are positing the myth of “shareholder maximizing” board operating in an open and transparent market.

      No, libertarians never think in terms of perfection. That is the domain of leftists. Libertarians simply argue that the voluntarily agreed upon relationships are the optimal ones in the vast majority of circumstances. In this case, (1) there is overwhelming evidence that executive pay is high because they have uniquely valuable talents, (2) there is no means to test someone’s competence other than letting them run a company and (3) no real-world non-marekt mechanism exist that would provide a superior outcome.

      The only reason we are having this discussion is because some people think the government can decide the how valuable executives are to companies and the greater society. That is what I am arguing against.

      In the grand scheme of things, executive compensation is a trivial cost to the total economy. The people who choose poorly in executives are the people who pay the price. You hire an idiot, you lose money. There really isn’t a better system than that.

      Just because you can abstractly identify a superior state, in this case, executives who receive exactly what they are worth, it does not follow that you have a real-world mechanism on hand that can bring about that superior state. While we all agree there are bad executives out there, libertarians argue that the likely cost of trying to weed them out by any means other than the market will be higher than cost they impose.

      It just a simple cost versus benefit tradeoff in an imperfect world.

    20. cjm Says:

      we are having a bad day, aren’t we :)

      my comment about using gates and Jobs as examples, was not directed to you.

      not sure how you get that i am a crypto marxist from my comments, or that i have an irrational dislike of executives. i owe my livelihood to the executives running the companies i work/have worked for. i couldn’t do their job nor would i want to. i am a happy cog and enjoy my place in the scheme of things.

      what i was critical of, was your writing in this article.

      anyway, i will continue to read your articles as they are generally well thought out and interesting. no one bats 100%, so don’t take it so hard that this one was a dud.

      here’s an interesting thought experiment: a ceo has to make a lot of decisions, across many areas of specialization. what percentage of these decisions are outside his field of expertise? when a decision is outside of the ceo’s field of expertise, what is the basis for this decision?

    21. T. Greer Says:

      Shannon –

      A question for you.

      Was it more difficult for CEOs to jump ship and start their own companies in the 1960s, ’70s, or ’80s then it has been since the ’90s? Executive compensation began its dizzying climb upwards c. 1995. If your thesis is true, something must have happened in the 1990s that made it easier for CEOs to build their own companies. So what was it?

    22. David Foster Says:

      T Greer..”Was it more difficult for CEOs to jump ship and start their own companies in the 1960s, ’70s, or ’80s then it has been since the ’90s?”

      It was far more difficult. There was much less availability of venture capital, and less-tangibly but also importantly, there was much higher prestige associated with large, well-known, and (supposedly) stable organizations. I can’t remember the source of the quote, but someone observed that in that era, “small business” called to mind “uncle Eddie’s shoe store,” not an exciting startup.

      To start a business requires not just the founder/CEO, but also a solid team of executives, and it would have been much harder to recruit such a team in those days.

      Also, depending on exactly what date we pick, tax policy could have made it much more attractive to be part of an existing company and get a lot of your pay in form of untaxed benefits rather than cash or stock appreciation.

    23. luagha Says:

      If you believe that CEOs are paid too much, why don’t you offer to be a CEO yourself at, say, 1/3 the price? Given all the money that the company will save by hiring you, wouldn’t it be quite the bargain? Surely the comapny, having saved so much, will be innately healthier?

      (Yes, I’m making fun of cjm, but actually, the CEOs and management at Southwest Airlines are pretty famous for accepting comparatively low pay for exactly that reason above. At one time they stated that the CEO would not be paid more than 10 times the lowest paid employee. That’s still true for the salary but the compensation for good performance sometimes pushes it up to 15 or 20.)

    24. cjm Says:

      luagha,

      or, take some high priced caretaker ceo, and see how well they do at starting a company and making a go of it. then see who’s laughing at whom.

      it’s kind of shocking (to me) that the english comprehension skills are so poor here. interesting too. i could give examples, but given the (ironic) nature of the problem…

    25. Alan K. Henderson Says:

      Executive compensation began its dizzying climb upwards c. 1995. If your thesis is true, something must have happened in the 1990s that made it easier for CEOs to build their own companies. So what was it?

      Maybe a political development in late 1994?

      Note that the DJIA increased its climb at around the same time.

    26. Mike Doughty Says:

      This is a never-ending argument. I spent over 30 years in Human Resources and watched executive compensation developments closely for a couple decades. One way compensation surveys are done: a company surveys the executive salaries of their competitors, do a “match” of jobs and come up with a salary range for a particular set of responsibilities. Then they decide at what percentile within this range they want to pay their own employees. Personally, I know of no company that wants to pay executives at the average pay level, so most select something higher, like the 75th percentile. Since these groups of companies are constantly surveying each other, this incestuously ratchets up executive pay. Interestingly, these companies often chose the 50th percentile for lower level clerical and operations employees.

      A company’s compensation “expert” knows the correct answers.

      If I sound sound a little cynical, it’s because I am.

    27. shannon Love Says:

      T. Greer,

      Was it more difficult for CEOs to jump ship and start their own companies in the 1960s, ’70s, or ’80s then it has been since the ’90s? Executive compensation began its dizzying climb upwards c. 1995. If your thesis is true, something must have happened in the 1990s that made it easier for CEOs to build their own companies. So what was it?

      That’s a very good question but I think the explanation is relatively simple. In the period from roughly 1920-1970 the corporate world became less competitive. Less competition means fewer other opportunities for executives and thus lower relative salaries.

      The 1980s saw the end of Americas mid-20th century experimentation with corporatism. A combination of technological and political factors lead to the creation of giant, vertically integrated corporations many of whom had du jure or de facto state granted monopolies.

      If you are over 40, you may remember a time when the entirety of America had one and only one phone company AT&T which operated the nation’s entire voice communications systems as federally enforce monopoly to the point that AT&T employees had police powers. Airlines, trains, shipping companies were likewise massively regulated to prevent competition. Unions prevented any serious competition within most of the heavy industries concentrated around the Great Lakes.

      Also, the communication technology of the time granted advantage to large, hierarchal organization of all kinds. This made large corporations often more efficient. Many of the hot technologies of the era, aerospace, plastics, broadcast electronics etc required large organizations to implement them.

      The military industrial complex was proportionately much large back then and many large companies had military contracts, even ones wholly unrelated defense. For example, the Matel toy company made a lot of the M16 rifles used in the 60s. Defense contracts provided profits for big companies that let them fend off smaller competitors.

      Lastly, tax, financial laws and corporate governance laws favored big business over small and medium sized business.

      All these factors reduced competition between corporations and limited executive opportunities which in turn depressed compensation. Moreover, because the companies themselves faced less competition, the actual skill and judgement of any particular executive counted for less than it does now. Back then a mistake didn’t mean as much as now. I mean, exactly what could have 1970s era AT&T exec done to destroy the company? After deregulation, AT&T evaporated. Today only the brand name remains on an entirely different company and it has gone through more executives in 5 years than the monopoly company went through in 20.

      Starting in the 1980s, we deregulated most industries. Now we have dozens of large communications companies instead of just one. Power utilities are about the only remaining formal monopolies left and they are shadows of their former selves. All that deregulation created more competition for executives and raised salaries. Technological changes gave smaller more agile companies a competitive advantage. New markets opened up that old big companies couldn’t compete in. The military-industrial complex shrunk, now days most military manufactures are dedicated to military work and a lot more military tech comes off the shelf. Tax, financial laws and corporate governance laws began to shift to more neutral towards small and medium sized businesses (that process has begun to reverse.)

      There are other factors. For example: Sarbanes–Oxley exposes executives to criminal prosecution and jail time if there are errors in their companies accounting even if the executives did not intentionally create the errors. If you are going to hire someone were they can go to jail through no fault of their own, you have to pay them hazard pay.

      I would say that the fact that executive compensation was lower in the past indicates that the market is the primary driver of executive salaries. All the factors that people claim to be the cause of “excessive” executive salaries today were much stronger in the past. It’s pretty much impossible to argue that “the old boy network” was weaker or shareholder input stronger pre-1980s than they are today.

    28. cjm Says:

      or maybe the same mechanism that led to exploding public sector payouts, is doing the same thing in the private sector — except there it’s restricted to a smaller percentage of the workforce.

    29. shannon Love Says:

      Cjm,

      …or maybe the same mechanism that led to exploding public sector payouts, is doing the same thing in the private sector

      I don’t think executives are unionized but something to look at. As I said in the previous post, all the factors that are trotted out to explain executive compensation today were stronger in the past. For example, it is a lot easier today for an ordinary stockholder to find out what a company is up to than it was in the pre-internet age.

      You know, these drive by comments that aren’t fleshed out as argument don’t really add much to the conversation.

    30. Dedicated_Dad Says:

      The AT&T breakup is a great example of how technology changes the playing field.

      It would likely have been possible to break it up a bit sooner, but there would have been much more risk.

      Some of us can remember the days of dial phones, when operators had to be used to complete overseas calls, and so on.

      Having multiple companies greatly increases complexity. In a monopoly, connecting the call cross-country is fairly straight forward. The area-code and exchange lets the call be routed to a CLEC with 10,000 end-points (the last 4 digits of the phone number).

      Breaking up the monopoly into REGIONAL monopolies was still fairly straight-forward — all parties knew which co. owned the area/exchange, thus it was no more difficult to route calls than before.

      When total deregulation occurred, things became more complex – and blocks of numbers had to be assigned to each Co. for routint to still succeed — but the complexity was managed by number assignment.

      The last stage — Local-Number-Portability (LNP) was introduced — threw the entire game out the window. Now there’s no way to easily route calls as the number could belong to any of numerous telcos. Further, the customer could switch companies at will – yet no breakdown in connections was tolerable.

      All this is now handled with a massive database. Each and every call made in North America requires tapping that database to find out how to route the call. Obviously this must happen almost instantly, and no downtime or incorrect data is tolerable.

      Most can probably guess at the necessary IT infrastructure needed to support such a massive and critical function, but only those with some datacenter-side IT experience can really grasp the amount of work and equipment necessary to support such an endeavor.

      In sum, the power and bandwidth for such a system simply didn’t exist prior to its inception, and constant evolution was necessary to keep up with the growing complexity as the system became less and less centralized.

      The internet, and VOIP, enabled a whole new evolution and introduction of still more complexity. Now – in order to route calls – we must not only know what CLEC to target, but (almost) literally anyone with the necessary bandwidth can open their own “phone company.”

      It’s both interesting and scary as all hell to have a peek behind the scenes of this whole big, complex monstrosity. Having the opportunity left me both impressed by how well things work and frightened at how easy it would be to take out comms for an entire continent. OTOH, its distributed nature helps to protect it from such a direct attack — once again a function of the available technology.

      DD

    31. Shannon Love Says:

      Dedicated_Dad,

      It’s both interesting and scary as all hell to have a peek behind the scenes of this whole big, complex monstrosity.

      It also explains why contemporary Telecom executives get paid more than those who worked for the monopoly AT&T. Modern telecom is complex and fast moving that a major mistake at the top can kill a company.