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Irwin Stelzer on Executive Compensation:

The economics commentator, Irwin Stelzer, has an excellent, plain-spoken article in the Weekly Standard on the issues of executive compensation in the financial institutions. Pay Day. It is an interesting article in part because Stelzer takes as his audience conservatives who are skeptical of government-established restrictions on compensation in the banks and financial institutions:

The Federal Reserve Board's monetary policy gurus are making cash available to banks at almost no cost, it can be re-lent to desperate borrowers at mouthwatering margins, and if anything goes really wrong, the government stands ready to bail you out. Free cash, or almost; high and rising charges to borrowers and consumers; bailouts if assets become toxic--what more can a bank president and his board want in this best of all possible worlds? Freedom to set compensation, that's what.

Stelzer then walks, looking to an audience skeptical of the idea of a government compensation czar, the consequent problems of moral hazard in bank compensation arrangements:

The most important and troubling lesson we have learned is that it is not how much executives in the financial sector are paid, but how that pay is structured. "Incentives matter" has long been a mantra of conservatives eager to allow the invisible hand to work its magic, rather than rely on government to direct economic activities. It was that belief in the ability of proper incentives to produce socially desirable behavior that underpinned conservative plans for welfare reform. With incentives and the public interest properly aligned, markets, not men, should decide on the allocation of a nation's resources, and on the division of the rewards for economic effort. Unless . . .

As Stanford professor Roger Noll put it in a communication he has generously allowed me to quote: "The financial whizzes did nothing illegal and were responding to the incentives they faced. The system of large cash bonuses for gains coupled with no penalty for losses leads them to play games in which the short-term probability of gain is high but the long-term probability of loss also is high. This is the basic underlying fact behind every financial crisis in the last 25 years. If we persist in a system in which a company makes X a year every year for ten years but then loses 25X in the eleventh, and we give Y in bonuses in the good years and zero in the bad, the whizzes will still prefer boom and bust."

When the pursuit of such incentives harms innocent bystanders, it is difficult to argue that there is no role for government to play in correcting what economists call market failure resulting from externalities, even at the risk of introducing government failure. We don't allow 8-year-old children to spend their days digging coal only because we are humane, but also because such an assault on the health and educational opportunities of these children imposes costs on society that are not borne by mine owners. We don't allow manufacturers to pollute if that damages the health of innocent bystanders, imposing costs on society. And we now know that the structure of financial incentives can lead to risk-taking that has serious consequences for society--for Main Street as well as Wall Street. If compensation is structured so that the rewards of risk-taking go to bankers and their shareholders, but the costs of failure are borne by a wider group, the bankers will take more risks than are economically efficient. And that is without giving weight to Adam Smith's shrewd observation that men tend to be excessive risk-takers even without a skewed reward system: "The overweening conceit which the greater part of men have of their own abilities, is an ancient evil. . . . The chance of gain is by every man more or less over-valued, and the chance of loss is by most men under-valued."

The argument that incentives and inclinations exist that lead to excessive risk-taking is not a moral argument, or a political one, or an argument in favor of a more equal distribution of income and wealth. It is solely an economic argument: Compensation structured as it has been in the financial sector results in an uneconomically excessive amount of risk-taking, just as a failure to make a polluter internalize the costs of pollution provides an incentive for him to produce more than if he had to pay all the costs he imposes on society.

But the solution need not, and should not, be the government pay czar sitting down and figuring out how much is "too much." The point is not how much, but in response to what incentives, what risks, and in what time frame. The fundamental problem is to unite short term and long term horizons. It will have to be less genteel than in the past, for a reason that Stelzer discusses with great acuity - the loss of "reputation" as a deterrent to externalizing losses. Stelzer means this in the classic economist's sense that "reputation" matters if one plans to be a repeat player; lost in the thicket of securitization and complexity and circle-jerk derivatives was any sense of repeat play and attendant reputation.

But Stelzer adds that other sense of reputation - one that interests me a great deal, as it goes to my view that the markets are anchored rather more by a shared, foundational, legitimizing, affective body of the 'moral sentiments' than is typically admitted in economic models. Says Stelzer:

Until now, economists held that the fear of "reputational consequences" would deter such behavior. But most of these transactions that originate with a broker paid up-front are one-off--the same customer is unlikely to return, or learn soon enough the consequences of his brokers' behavior to warn others. Executives who bring down their institutions leave with golden goodbyes and access to talk shows on which they unashamedly--shame being in short supply these days--justify their actions en route to a game of golf at a country club, dues paid by the company from which they departed but at which an office and staff support are still available to make their transition to a new life friction-free.

I exaggerate: Not all cases fit that description. But almost all have one characteristic in common: The cost of the pursuit of the incentives contained in a compensation package, when that pursuit leads to major loss, has not been borne by the pursuer, but by thousands of people he has never met.

Addressing the problem of executive compensation moral hazard through quasi-populist regulation of 'how much' will come to several kinds of grief, in my view. One is that, yes, it is welfare-maximizing, to say the least, to have highly compensated expert risk takers; compensation levels as such are not the issue, moral hazard is.

Second is that such systems of non-market regulation rapidly - are already - leading to crony capitalism, whatever grand names one wants to put on it. Fannie and Freddie showed us the way, and the result is spectacular misallocation of capital, labor, and the loss of investment in the ways most likely, given all the uncertainties, to produce the growth the next generation will desperately need, after paying the costs of seeing off my Baby Boomer generation to its final rest.

Third, I say "quasi populist" because the effort to regulate pay as such is not really about true populism - it is, as David Brooks pointed out a few months ago, much more the revenge of DC's Ward 3 over the bankers of Wall Street. He meant by that the opportunity for the regulatory class of lawyers and senior civil servants of my neighborhood in Washington DC - 20016 - to humble the financial class that for years made them seem like The Stupids for not being on Wall Street. Brooks is best when he skips politics as such to focus on these kind of comic-Veblenesque-sociological reads of the economy, and he captures something exactly. I guess one would call it the deliciousness of a DC government lawyer, well compensated by any standard other than Wall Street's, being able to set, or threaten to set, compensation for these people.

The appeal is irresistible to a certain professional New Class but not exactly populist. The reason these "populists" are stretched is from trying to make tuition payments to Sidwell Friends, National Cathedral School, or St. Alban's - all of whose annual tuitions, so far as I can gather, are slated to hit around $50,000 a year in current dollars by ten years from now. But what appeals to these technocrats is not devising a structure of incentives - it is the naked exercise of moralizing power over paychecks, one group of professionals, exercising political power in the political sphere, over another, the previously untouchable and in every way advancing, winner take all, professional class of financiers.

(More another day on this crucial, under-discussed issue of the New Class. But the social conflicts that Brooks describes, exemplified by the executive pay issues, are really struggles among professionals within the New Class, rather than the New Class versus everyone else.)

(Update, bringing up a comment of mine into the post: The third point is to say, and perhaps I wasn't sufficiently clear, that the people who as the bureaucracy, the permanent government, would have to carry out a program of setting pay as such, do not act as populists in the classic sense - and, this being the point, that affects how they see their interests and motivations in carrying such a policy. It might, I suppose, be a good policy or a bad one - though obviously I think it a bad policy, setting compensation as such. But my third point says, or anyway is intended to say, that it does matter to know the motivations, class background, class interests, and so on of the people to whom such policy is committed. If you assume it is simply that of populists, you might find a very different understanding of What Is To Be Done than if you see them, as I do, as part of the new professional class. The struggle over compensation policy is an internecine one. And did I say that to be a libertarian-conservative in no sense deprives one of Marxian analysis? :)

Constantin:
I'd rather take my chances with an unregulated system, considering who would be doing the regulating in the alternative. Look at what Henry Waxman did this week with the insurance companies--someone wrote that King George III would have thought it audacious--and claim with a straight face that pay regulations would have anything at all to do with protecting the public from the effects of moral hazards.

All of this would have been true for me in 2005, too.
8.22.2009 4:45pm
byomtov (mail):
Whie this is an interesting post, I think you lose it when you say things like,

"what appeals to these technocrats is not devising a structure of incentives - it is the naked exercise of moralizing power over paychecks,"

This is talk-show rhetoric, not analysis.

It's a wild generalization of the kind Brooks is so fond of. Even if there are some people who fit your description it's hardly fair to claim that as the main motivation for concern over compensation. You yourself recognize that there are legitimate issues. Who made you and Stelzer the only objective disinterested observers?

Then, of course, there is the issue why something is necessarily a bad idea just because some of those promoting it are not doing so from the purest of motives. That seems to be the essence of your third criticism.
8.22.2009 4:48pm
Kenneth Anderson:
The third point is to say, and perhaps I wasn't sufficiently clear, that the people who as the bureaucracy, the permanent government, would have to carry out a program of setting pay as such, do not act as populists in the classic sense - and, this being the point, that affects how they see their interests and motivations in carrying such a policy. It might, I suppose, be a good policy or a bad one - though obviously I think it a bad policy, setting compensation as such. But my third point says, or anyway is intended to say, that it does matter to know the motivations, class background, class interests, and so on of the people to whom such policy is committed. If you assume it is simply that of populists, you might find a very different understanding of What Is To Be Done than if you see them, as I do, as part of the new professional class. The struggle over compensation policy is an internecine one. And did I say that to be a libertarian-conservative in no sense deprives one of Marxian analysis? :)
8.22.2009 5:18pm
troll_dc2 (mail):
So you do not like what appears to be going on with respect to compensation limits, but you seem to agree that something has to be done about skewed compenation schemes. But what is that something? You state that the quasi-populist approach that seems to be occurring will lead to bad results (and, if I may add, unfortunate unintended consequences, though maybe there will be some unanticipated benefits as well, although I would be hard-pressed to think of any right now).

So what approach would you adopt, and what would it entail? I
8.22.2009 5:25pm
SuperSkeptic (mail):
Stelzer's argument is that executive compensation should be regulated because of "externalities" and that this is a classic economic argument that is, in essence, irrefutable.

Externalities, always the cry of "but the externalities, the externalities!" I've made this extreme meta-argument here before, but: Of course - every private behavior produces some abstract "externality" by virtue of the fact that we, the human population, share the same finite Earth.

Externalities are a permanent force, like majorities, that need to be dealt with, surely - but they cannot be cited in support of the merits of every state intrusion into the private world any more than "well %50+1 support it" can. The logic of this would set a sort of presumption in favor of regulation and control, not liberty.
8.22.2009 5:27pm
troll_dc2 (mail):

Externalities are a permanent force, like majorities, that need to be dealt with, surely - but they cannot be cited in support of the merits of every state intrusion into the private world any more than "well %50+1 support it" can. The logic of this would set a sort of presumption in favor of regulation and control, not liberty.



Is the problem of executive-compensation incentives one in which externalities should be cited in support of regulation? If not, why not?
8.22.2009 5:35pm
byomtov (mail):
Kenneth Anderson:

"Marx was actually quite accurate in much of his description of economic activity." :-)

Where I differ is in the assumption that the motivations are uniform and envy-based. After all, it does your presumed class no direct good to limit the pay of Wall Street types. They don't get the money the bankers give up. No doubt they are envious of those paychecks. I am. But where is the support for the argument that this is what will drive the decision-making?

Now, I happen to agree with the proposition that having the government set compensation is, in general, not a great idea. At the same time I think the idea that current and recent levels, on Wall Street and in executive suites as a whole, are somehow "market-based" in any realistic sense, is wrong. (What do you think Marx would have said?)

I think Stelzer's points are well-taken, except for his reliance on the strength of reputational effects. Perhaps it is worth asking why allegedly free-market compensation schemes have evolved into the dysfunctional form he describes.
8.22.2009 6:14pm
Randy R. (mail):
"incentives matter." Well, yes and no. The way pay is structured for top executives, they get huge payments if their company either has a high profit or a high stock price. And that's a good incentive.

However, if the company loses money, or the stock price tanks, they still get huge payments. Therefore, there is no incentive at all to do well -- your pay is still very high *regardless* of your competence or your decisions.

If the companies were as truly capitalistic as they claim, there would be stiff penalties against any executive for losses or price dives. Which means, of course, they are not capitalistic at all. In fact, they are a reverse sort of Marxist.
8.22.2009 6:21pm
Kenneth Anderson:
One way it matters that the struggle is internecine, rather than being between a professional managerial elite and some unwashed masses is that it feeds directly into the possibility of crony capitalism. Meaning by that - if you are one part of the professional managerial elite, you might be able to buy off another part of it, in a way that is not possible for the Great Unwashed because there is not enough money. I agree with you that much of what has gone on on Wall Street in recent years bears no resemblance to market capitalism, because it de-links risk-taking from loss-taking.
8.22.2009 6:23pm
Kenneth Anderson:
In my classes, I sometimes point out that we could deter risk-taking rather well if we held the children of executives and bankers and financiers hostage, and offed one or two a year for their parent's failures. Students mostly giggle - though some of the foreign students from particular countries don't giggle and look entirely too serious (something that should give our economic elites some pause when asking China to purchase so much of our debt, but anyway ...). Then I ask them if this would be likely to produce an efficient level of risk-taking. As you can imagine, three years ago the answer was one thing, and last year, well, quite another.
8.22.2009 6:31pm
SuperSkeptic (mail):
Is the problem of executive-compensation incentives one in which externalities should be cited in support of regulation? If not, why not?

Well, in the broadest sense, sure it should. For the reasons Selzer cites and more. Basically, if the capitalist system is driving the wrong sort of executive-compensation incentives to the detriment and injury of the "economy" of the masses, then it is a "classic externality" that justifies the regulation of the actors who have shifted their waste product onto other, non-actors injuriously.

But I don't see it that way, nor define the actors as such.

Narrowly focused, these "externalities" should not be cited because they do not accurately reflect the world (same problem with marxist analysis generally). An individual executive at Home Depot's compensation scheme to not harm me, as an idividual. I am untouched, untrammeled. That his business operates in the same world as me, does not make his compensation by that business accountable to me (absent a justifiable retribution due to injury).

So, no.
8.22.2009 6:37pm
SuperSkeptic (mail):
As an afterthought troll, and to follow up on prof. Anderson where he says:
In my classes, I sometimes point out that we could deter risk-taking rather well if we held the children of executives and bankers and financiers hostage, and offed one or two a year for their parent's failures.

It must be remembered that it is the law which gives individuals a degree of immunity for actions they undertake under color of corporation that might otherwise be negligent homicide. Abolition of corporate liability shields might strike the actual (or more accurate) balance appropriately, with individual actors being responsibile solely for their actions. Just an afterthought, as to how the focus on externalities is a distraction and a diversion...
8.22.2009 6:44pm
troll_dc2 (mail):
SS, I quite agree with you on the Home Depot compensation scheme. What happens or does not happen to HD has little or no bearing on the overall welfare of society.

But the planned limits on compensation concern only the large financial institutions that have the unique ability to harm people who never deal with them. (That is, they cause externalities for those people.) The proposition is put forth that the incentive system used to determine bankers' compensation was skewed improperly, causing them to focus on bonus-maximizing activities without concern for the consequences of their behavior.

Am I correct in reading you as saying that the proper reaction should be to shrug one's shoulders?
8.22.2009 7:03pm
SenatorX (mail):
"The Federal Reserve Board's monetary policy gurus are making cash available to banks at almost no cost, it can be re-lent to desperate borrowers at mouthwatering margins, and if anything goes really wrong, the government stands ready to bail you out. Free cash, or almost; high and rising charges to borrowers and consumers; bailouts if assets become toxic..." IS

"I agree with you that much of what has gone on on Wall Street in recent years bears no resemblance to market capitalism, because it de-links risk-taking from loss-taking." KA

Government, regulate thyself! Focusing on compensation is going at it from the wrong end of the problem. You don't blame a baby for sucking at the teat.
8.22.2009 7:10pm
Arkady:
@Ken Anderson


[M]uch of what has gone on on Wall Street in recent years bears no resemblance to market capitalism, because it de-links risk-taking from loss-taking.


But that's the bedrock problem, right? One night, a while back (after a couple of glasses of wine, I admit), I had the thought that what's going on is an epistemological, even an ontological, de-coupling: Reality at the highest reaches of finance is balance sheets, and stock movement projections, and all the abstract panoply of modern financial calculation. I wasn't able to get very far with the "insight", I'm afraid. (It was an instance of what Mailer said was the problem with drinking and writing: You waddle up to the secret of the universe and find you've lost your vocabulary.) But I think there is something to it. There's a profound disconnect up there in the heights between the world as it is and the paper world in which those folks spend most of their time.
8.22.2009 7:16pm
troll_dc2 (mail):
Prof. Anderson seems to be interested in the sociology of setting the compensation limits. But is not the process as just as important as the people? What rules would be laid down? What formulae would be adopted? If they are tight enough, the Ward 3 types won't have much discretion.

On the other hand, if the rules are too tight, efforts might be made to get Congress to change the rules, or unhappy bankers might take jobs in Dubai or move to unregulated firms.

There will always be fuzziness and unhappiness. The goal should be to avoid as much of this as possible.
8.22.2009 7:18pm
DiversityHire (mail):
The decoupling of risk-and-reward applies to all sides in this internecine battle. The faux-populist parts of the plutocracy are at least as immune from loss-taking as their targets. We, the "unwashed masses", are complicit in seeking security and reward without responsibility or risk, willingly ceding freedom and responsibility for promises of material gain. We burst one bubble, and inflate the next with real ressentiment, phony assignation of blame, and false relief from responsibility.
8.22.2009 7:34pm
Obvious (mail):
KA: "And did I say that to be a libertarian-conservative in no sense deprives one of Marxian analysis? :)"

It is a mistake, of course, to think all class analysis is Marxist. Class analysis actually predates Marx and was originally libertarian in approach. It is a function of what makes up the classes. In the work of French liberals Charles Comte and Charles Dunoyer, which predated Marx by several decades, the classes were the net tax-payers and the net tax-consumers.

See http://www.fff.org/freedom/fd0606b.pdf
8.22.2009 8:14pm
Mark N. (www):
Would you support a more shareholder-oriented sort of regulation, like the "say on pay" requirements that shareholders be given a vote on executive pay? That seems roughly in line with the overarching fiction of shares that they're a share of ownership.

In privately owned companies, it would be unthinkable that the owner would be unable to set or veto payment packages for his top staff--- he might delegate decisions to HR for how to pay the lower-level staff, but a new CEO is not going to be paid any particular salary without the owner signing off. Not only do shareholders often not get a say in this, but sometimes the management actively ignores the shareholders, and is somehow able to get away with it: when Shell's shareholders voted down its executive pay package a few months ago, management announced they were going to pay it anyway, because the vote was only advisory. It seems like making those sorts of votes binding wouldn't really be bureaucratization, but merely a way of returning ownership of companies to, well, the owners, rather than leaving it with rogue employees who ignore the directives of their employers.
8.22.2009 8:43pm
SuperSkeptic (mail):
But the planned limits on compensation concern only the large financial institutions that have the unique ability to harm people who never deal with them. (emphasis added)

That's just it, I do not see a "unique ability to harm people who never deal with them." I see no externalities, only contrivances for the purposes of social manipulation via coercive government. If the shareholders wish to voluntarily address their executives' compensation schemes or impose more accountability, it is their place to do so, not ours. (again, absent some actual injury other than simply being a "large financial institution")

So, that's not shoulder-shrugging, but a principled suggestive alternative means to fixing the same problem without losing liberty - which exposes the faulty grounds (citing externalities) of those seeking to regulate and control by different, coercive means.
8.22.2009 9:31pm
n_shapero (mail):
Your right to move your fist ends where my nose begins. The law should be there to help define "where my nose begins". When individuals can follow courses of action that result in the loss of property mounting into the tens or hundreds of billions of dollars (or more), then it is appropriate for society to take action, through laws, to attempt to reduce the likelihood that such "actors" will get away without punishment (thereby HOPEFULLY reducing the probability of repeat "mistakes" of this sort).

A willful and reckless disregard for the consequences of one's actions is, if I might be so bold as to say so, a good definition of negligence, for which there should be a legal remedy.

The alternative to such a remedy, sadly, is a potential loss of public belief in the legitimacy of the system (which leads, down a very unpleasant and steep slope to consequences that none of us likely want).
8.22.2009 10:03pm
Rich Rostrom (mail):
Randy R: However, if the company loses money, or the stock price tanks, they still get huge payments. Therefore, there is no incentive at all to do well -- your pay is still very high *regardless* of your competence or your decisions.

False, unless the Board of Directors is not doing their job.

Besides which, in the case being addressed, executives collect large bonuses if the company makes large profits and the stock price goes up; but if the company tanks, they get little or nothing.

The problem is that this is not a balanced scheme: the incentive to achieve profits is not matched by an incentive to avoid losses. Thus executives are encouraged to pursue large profits, even at a greater cumulative risk of large losses. They win in the good years - in the bad years they break even, while shareholders and others lose.

However, there are many forms of this problem, and it has never been possible to eliminate it. Suppose I, a lower-tier employee, have an opportunity to speculate with illegally borrowed company money. If I succeed, I become enormously rich (and the company is unharmed). If I fail, I go to prison (and the company loses say $1M).

I gets all the upside; my downside is limited to my personal assets and liberty. If the speculation has a 50/50 chance of success, a lot of people would take the chance. Think of the Alec Guinness character in The Lavender Hill Mob: a bank clerk whose boring life seems little better than prison anyway.

The problem is really rooted in the practice of people managing other peoples' money. If successful management is rewarded, then the potential reward will exceed the potential risk to the manager.
8.22.2009 11:15pm
jackbrennen (mail):
I've long thought that the rise of mutual funds was a scam perpetrated to prevent a significant block of shareholders from exercising franchise and thus be unable to prevent all sorts of management shenanigans.
8.22.2009 11:54pm
Mac (mail):

Randy R. (mail):
"incentives matter." Well, yes and no...



I totally agree with everything you said. Perhaps one of us should be worried?

Rich RostromI

False, unless the Board of Directors is not doing their job.

Besides which, in the case being addressed, executives collect large bonuses if the company makes large profits and the stock price goes up; but if the company tanks, they get little or nothing.


It seems to me that a large number of executives have left companies that "tanked" and did extremely well with their golden parachutes. Also, you have only to look at GE and Imelt to see a CEO who has done a terrible job, yet gets a fantastic salary and appears to have had no negative consequences. Heck, he even got himself on Obama's economic advisory team which makes one seriously wonder about the rest of the folks on that team and just what advice they are giving.

I think you nailed it with. "unless the Board of Directors is not doing their job". Maybe they are the ones who need to be held accountable?
8.23.2009 2:42am
Mac (mail):
Since Congress and the President are so fond of the idea of setting executive pay, why don't we the people set their pay to the GDP, Unemployment rate, Debt and Deficit, soundness of our retirement plan (Social Security and Medicare) and the success of the stock market?

Maybe then they would not be so eager to have the taxpayer assume all the risk for the absolute fiasco that was Freddie and Fannie who gambled big time (with Congressional approval, including that of Obama) and put us on the hook for paying for the subsequent disaster.
8.23.2009 2:49am
n_shapero (mail):

Mac said:
==========================================================
Since Congress and the President are so fond of the idea of setting executive pay, why don't we the people set their pay to the GDP, Unemployment rate, Debt and Deficit, soundness of our retirement plan (Social Security and Medicare) and the success of the stock market?
==========================================================

Personally, I believe that the motivating factor for congress critters and the President is not so much money as power (the pay, even for the President, is nothing compared to the sort of pay that a CEO of a major corporation gets - and I believe that it is easier to become the CEO of a major corporation than it is to become President of the United States). If the GDP tanks, the unemployment rate soars, or Social Security and Medicare tank and disappear, the public will, I think, respond by "voting the bastards out" in favor of a new set of "bastards" who are willing to promise to fix the troubles "caused" by the last set of "bastards".

And if, as is the case for the automobile companies, the government owns more than 50% of the stock, I think it is the government's RIGHT to decide on executive compensation packages (just as I believe that stockholders have such a right - based on their ownership of the company). It's a case of the golden rule (he who has the gold gets to make the rules).
8.23.2009 4:50am
byomtov (mail):
False, unless the Board of Directors is not doing their job.

This depends on how you define the Board's job.

In the imaginary world of introductory textsthe Board is elected by shareholders, and its main obligation is to supervise mangement, including of course setting compensation, hiring and firingand son, with shareholder interest foremost in mind.

In the real world the Board is chosen by management, formally installed in Soviet-style one-candidate elections, and mostly does what management wants, including in the setting of compensation. If it's forced, out of embarrassment, to fire a CEO, the fired exec gets a more than generous severance package. Since, contrary to theory, the Board is selected by management, and paid generously, its incentive to "do its job" is an incentive to do what management wants.

Here is where I personally believe the compensation problem ought to be solved. Give the owners - the shareholders - a meaningful voice in the operation of the corporation, including a chance to nominate candidates for the Board and to vote on compensation. I'd also require mutual funds, pension funds and anyone else who holds shares on behalf others to place their fiduciary duty to their clients ahead of any desire to be buddy-buddy with management.
8.23.2009 1:59pm
Mac (mail):

If the GDP tanks, the unemployment rate soars, or Social Security and Medicare tank and disappear, the public will, I think, respond by "voting the bastards out" in favor of a new set of "bastards" who are willing to promise to fix the troubles "caused" by the last set of "bastards"



Overall, I agree with you. I was just thinking that it would be great news if Congress and the President had their pay cut because they were doing a bad job. It would certainly draw a lot of attention to the job they are doing.

We could also cut their pension by, say one year, for every failure to meet the standards. As they get full pay for life with COLA, I believe, plus health care, this may make them think. At least it might change the discussion from the usual stupid, frivolous stuff they prefer to ones that matter to the country.

They would be in jail for the way they have not funded our retirement program that we have paid 15% of our salaries into for most of our lives and would be in jail for not adequately funding our retirement health care while giving us no choice but to take Medicare.

In addition, they make Enron, et al look like financial conservatives as they have now, just since January, made us the third largest debtor nation in the world behind only Italy and Japan. This is so bad we would be denied admission to the EU as our finances are in such bad shape.

They want to hold corporate America's feet to the fire? Great. Let's apply the same rules to them. They take the money from the same corporate America when it comes time finance their campaigns. They write the rules corporate America follows, including the idiotic mortgage rules that caused this mess. Let both the Executive branch and Congress live by those same rules.
8.23.2009 4:36pm
srp (mail):
The whole narrative here is flawed:

1) At least for non-financial CEOs, the historic problem is their excessive risk aversion (and addiction to empire building over maximizing expected NPV). We want to "lean against the wind" with these guys to get them to take some chances (and to make politically painful cuts in employment). That implies making their compensation depend more on performance and giving them a bigger upside than downside.

2) The golden parachutes are not given AFTER the guy screws up. They are negotiated upfront when the CEO assumes his post. And since the CEO job has become much less secure and cushy in the past few decades (look at turnover rates and pressure from the Street), the people you want won't take the job without such protections. Or, to put it another way, you'd have to pay them way, way more on the upside if you want to avoid the golden parachute provision.

3) The alleged "externalities" of financial company failure are nothing of the sort. Anyone who does not want to deal with parties who may not be able to pay them back is well able to avoid it. Don't want to be exposed to a strategy that buys lots of CDOs during a time of overheated real-estate markets? Then don't invest in companies that do that sort of thing.

4) Using public bailouts as an excuse to regulate pay is foolish for two reasons. First, no one is forcing the taxpayers to engage in these bailouts (which have been ill-advised for the most part, in my opinion). Second, for those entities now largely owned by the government, if the public wants to get its money back, it should set incentives with that in view, not populist notions of fairness.
8.24.2009 3:23am
rj (mail):
So your strongest counter-argument is that... you think Washington lawyers are bitter snobs?

We can call this the Palinization of the libertarian right: when naked self-interest and the omniscience of the invisible hand look ludicrous given the current situation, resort to calling government bureaucrats and lawyers elitist.
8.24.2009 3:06pm

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