Perverse Incentives Are Endemic (TM)
Posted by Marc Hodak on June 7, 2008 under Revealed preference | 
Comments are off for this article
Quick, quick. Congress has a choice between saving the world in 2020, or getting votes in 2008, what do they choose?
This is not a trick question. It’s a sigh of relief.
Posted by Marc Hodak on June 6, 2008 under Scandal | Comments are off for this article
The headline pops, and I’m trying to evaluate this statement well below the lede:
“None of the parties who entered into the settlement agreement has acknowledged any liability or wrongdoing and each made their contribution solely to facilitate a settlement,” Cablevision senior vice president Charles Schueler told Reuters.
Absent any additional information, the average reader of an article titled “Settlement reached in Cablevision lawsuit” would assume that this statement is corporate b.s. Since this was an options backdating case, it would be presumed that the participants were all guilty, and that they deserved to be punished.
On the other hand, few if any backdating cases resulted in shareholder harm. And the law firm prosecuting this case is as known as Milberg Weiss for going after high-profile corporate cases, often after the same defendants, where the distinction between legitimate and nuisance lawsuits is very fuzzy.
Would a company pay out $34 million to make a high-profile lawsuit go away and eliminate the risk of a jury trial? Could happen. The point is, we don’t know, but most of the readers of this headline would profess to have a certain knowledge.
Posted by Marc Hodak on June 4, 2008 under History | Comments are off for this article
That headline contradicts most people’s view of the history of Social Security, the most visible, surviving legacy of the New Deal. But it’s true.
Roosevelt, of course, promoted and signed into law the original Social Security Act of 1935. But that law set up a forced savings/redistribution program for limited portion of the population (* details below the fold). It used the contributions from the participants to set up reserves, and it paid beneficiaries from those reserves. The plan was more or less self-contained. In 1943, President Roosevelt vetoed legislation that would turn Social Security from the forced savings/redistribution program it was set up to be into the pay-as-you-go program that, once his veto was overriden, we know today.
The 1943 debate on this law centered on governance. For Roosevelt, good governance meant continuing the Social Security program as it was originally envisioned–actuarially self-financing. To Arthur Vandenberg and other Republicans, it was clear that Congress was simply using the “reserve fund” as a cover to squander money on pet projects. In their minds, shutting down the “reserve” was just a way of restoring fiscal discipline.
Posted by Marc Hodak on under Politics | Comments are off for this article
Barack Obama had flatly rejected the idea of being Clinton’s VP during the primaries. I don’t recall that Clinton has ever rejected the idea of being Obama’s VP nominee, though most people had assumed during their battle that she wouldn’t condescend to be anyone’s VP.
In game theory, Obama’s position would be considered to border on brinkmanship. “If you want me, you’d better vote me to the top of the ticket.” Clinton’s position would be considered as hedging. “I want to be the presidential nominee, but I won’t rule out the second spot, just in case.” In a sense, Clinton’s position doesn’t seem as strong; her hedge opened up the possibility of voters who are on the fence going for Obama; that way, they might get both.
On the other hand, Clinton has known for a while now that she was likely to lose the presidential nomination. She has been arguably playing for “rebound position” since Super Tuesday, where if the shot doesn’t go into the basket, i.e., Obama has a serious slip up, or worse, she’s ready with her sharp elbows to catch the rebound. Angling for the VP slot might simply be a continuation of the rebound positioning, which could continue right through an Obama presidency.
That might work better for Bill, too. I never believed that Bill was rooting for his wife in this campaign, no matter what he said or did. His multi-million dollar earning power would be lost for the most productive period of his life. Screw that. Bill would probably find being second-husband far less constraining than first-husband.
Posted by Marc Hodak on June 2, 2008 under Executive compensation | Be the First to Comment
In the latest issue of Directorship, Amy Borrus of the Council for Institutional Investors says,
Additional sunlight is chasing some perks away at some companies. That’s a good thing–perks are the polar opposite of pay-for-performance.
So is salary. Is CII advocating that CEOs be paid purely on variable compensation? That kind of runs counter to the oft-stated desire to bring down overall CEO pay. Surely, institutional investors can’t expect CEOs going all-variable to forego extra compensation for the extra risk they must bear. Their investment clients certainly would accept such a trade-off. Who would? The “it’s-not-pay-for-performance” critique of perks is too simplistic for an organization like CII.
There is only one good reason to cut perks: They look bad. It looks bad that a CEO who is making millions of dollars per year has the company paying $20,000 for a country club membership, or $15,000 for tax planning. It makes the CEO look grasping, when in fact these perks long preceded their accession from a time when they made perfect sense. It looks bad for the board because it makes them look like a bunch of stooges who can’t say “no” to the smallest thing.
The fact is that most boards can say no. They’re really not all incompetent or corrupt. They have been saying no for years. The fact is that these perks were generally good for the shareholders. They came about, admittedly in a more innocent age, because they represented tax-efficient ways to compensate their executives. If a board takes away $100,000 worth of perks that can legitimately be offered for business reasons, such as country club memberships (for business development), tax planning (to avoid personal financial issues, or fraud), or car and driver (for security), then the executive paying for those items with their own after-tax dollars would have to have their pay increased by about $200,000 to make them whole, especially if the board expected the CEO to retain many of these services.
But, since perks look bad, boards take them away, executives largely replace them at their own expense, and shareholders pick up the tab anyway, except twice over.
Posted by Marc Hodak on June 1, 2008 under Collectivist instinct | 4 Comments to Read
This is amazing (not in a good way):
Your head will explode when you’re done. Really.
From that fringe, left-wing cult–the Australian Broadcasting Corporation–telling the average Aussie kid that they should die at about 9 years old to make way for the “good” kids who don’t use energy or have money. Where is the outrage? We’ll check back.
HT: The awesome Coyote Blog
