Posted by Marc Hodak on November 30, 2008 under Revealed preference | 
It was only a matter of time before a union official found a way to politicize the unfortunate death of WalMart employee, Jdimytai Damour, who was trampled in a Long Island store. According to the SEIU, UFCWU and assorted other XYZUs, there is not an ill in the world that would not be cured if only WalMart were unionized.
In this case, the chain of logic apparently goes like this:
– WalMart uses something close to slave labor to keep prices low (ergo, the customer throngs)
– Part of their low-cost structure includes skimping on various security measures
– A decent union would not have allowed them to skimp on these measures
– Thus, the crowd would have been more orderly, and the man would not have been trampled
This final conclusion is merely insinuated in this story, not spelled out in a manner that might require at least an iota of evidence.
It’s kind of disgusting that anyone would use a tragedy like this for political positioning, but that’s the job of members of the TIOU (Traffickers In Outrage Union). This meta-union includes politicians, organized labor leaders, and the mainstream media. Their unofficial motto: “There outta be a law!” (because, clearly, letting a free people do what they want with their own property isn’t working perfectly).
The UFCWU official in this instance asked:
“Where were the safety barriers? Where was security? How did store management not see dangerous numbers of customers barreling down on the store in such an unsafe manner?
WalMart answered that they had:
added internal security, brought in outside security, erected barricades and worked with Nassau County police in anticipation of heavy crowds.
The video of the stampede supports both WalMart’s contention, and the unusual nature of this event:
Minutes later, police trying to give Damour first aid were jostled by customers still running into the store, authorities said.
Members of the TIOU are especially good in portraying themselves as more concerned about your stakeholders than you are. If it weren’t for the law, you would poison your customers, torture your workers, and pollute your communities. There is not an ounce of shame in proclaiming these things as your stores are thronged by customers and job applicants, and as communities offer all manner of enticements to lure you.
A reasonable verdict of WalMart’s safety strategy would look at their rate of worker injuries given the number of stores they have, including the 2500+ stores that didn’t have any damage to their front doors, versus that of other retailers. Of course, such a perspective would make it extremely difficult to summon the kind of outrage that would warrant inflicting a union on all those stores on the questionable premise that a union would have prevented this kind of incident.
For my part, I’m going to keep taking my chances at WalMart based on the same commercial motives that animate the TOIU.
Posted by Marc Hodak on November 25, 2008 under Revealed preference |
The reason for this is best expressed by my reaction when I saw the headline this weekend about separating the company into a “good bank” and “bad bank.” My first thought was, “how would one would be able to tell the difference?”
But if I were a direct Citi shareholder, I would right now be far more concerned with getting the right people in place, even if they cost a few million more, than about trying to get or keep discount executives, as our political class is insisting upon. The difference between the best and next best in leadership could easily be worth tens of billions of dollars in value enhancement of the bank’s assets. Why would I risk that over a few million in incentive compensation? Of course, silly me, I believe that sometimes you get what you pay for, and that incentives matter.
Also, I won’t invest in a bunch of insomniacs:
In similar news, AIG announced today that they will freeze salaries for their top seven executives and reduce the salary of their CEO, Edward Liddy, to $1. According to Cuomo logic, the shareholders should be ecstatic:
“We believe these actions demonstrate that we are focused on overcoming our financial challenges so AIG can return value to taxpayers and shareholders,” Mr. Liddy said in a statement…
Mr. Cuomo applauded AIG’s decision to limit executive pay, and said other companies receiving federal bailout money should follow suit…
AIG shares fell 4 cents, or 2.5%, to $1.73 in afternoon trading.
During which time the overall market increased by about 2.5%. Hmm.
Posted by Marc Hodak on November 24, 2008 under Executive compensation |
Citigroup has made a deal with the government. The way it’s reported, it sounds like the bank will get over $320 billion in capital and guarantees if they agree to curb senior executive pay to the tune of about $0.03 billion.
OK, so this version of the bailout deal is kind of a warped narrative, but no more warped than the prominence that this aspect of this transaction is getting in the popular press. I believe that all this attention illustrates as clearly as anything how the debate about executive compensation is really two debates. One debate is about dollars; the other is about process.
The more interesting debate by far–the one about dollars–draws most of the unnamed “critics” into the public light, those merchants of outrage cited in the breathless reports in the media. These critics’ attitudes are well summarized as such:
The public wants “strict limits on executive pay,” said Sarah Anderson, a pay expert at the Institute for Policy Studies, which has pressed for executive pay curbs.
IPS is one of those progressive think tanks that provide a ready stable of pay critics (or, in this strange rendering “pay experts”) whenever the subject of compensation comes up. Their critique is simple: the people want limits on pay.
I’m not sure what percentage of the public on whose behalf they speak would describe themselves as progressive (or it’s close cousin, socialist), but a hallmark of any collectivist ideology is that it presumes to speak for “the people.”
In any event, the progressive case presumes that the economy is kind of a zero-sum game, where wealth creation just happens, and wealth distribution is the result of arbitrary decisions by those in power. Such a view naturally leads to the conclusion that higher paid people get theirs at the expense of other, presumably lower paid, people. If you buy these premises, then the solution to “excessive executive compensation” is to define whatever the higher paid group makes as excessive, i.e., in need of “strict limits,” then give “the people” (read: the government) the power to decide how this excess should be distributed.
The idea that certain individuals might have some hand in creating the revenue from which their pay is derived does not enter into the equation. If a salesman’s commission revenue has dropped 50 percent, “the people” may think he deserves nothing, regardless of the commission structure that top executives, the board, or the owners may think is reasonable. Let’s put it up to a vote.
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Posted by Marc Hodak on November 19, 2008 under Self-promotion |
UBS is trying some new incentive plan structures. It is adopting most of the elements that our research has shown works for public companies.
One of those elements is a potentially uncapped reward. Incentive compensation has many moving parts, so it might seem counter-intuitive that a capped bonus potential actually undermines accountability to shareholders, but it’s true–both in theory and in empirical research. The article notes that the uncapped bonus aspect of the proposed plan is a sticking point for “shareholder advocacy group” Ethos. The article ends with:
“UBS does not intend to limit the variable part of the remuneration, by capping for example the bonus in terms of base salary or by setting a maximum amount of shares to be awarded under the long term incentive plan,” Ethos said.
“Consequently Ethos has concerns that the new system will not prevent UBS from paying, in the future, remunerations that could be deemed excessive.”
Ethos’s concerns are unfounded. If they understood how all the elements of the plan work together, and see how it actually works with some of our past clients, then they would see how this aspect of the plan is actually critical to preventing excessive remuneration.
Alas, we can attest that very few “shareholder advocates” or institutional shareholders or any other outsiders who have not been apprised of the plans as the board has, can really, fully comprehend them, especially if the plans involve any innovations. Yet these are the people to whom we want to give a “Say on Pay.”
Posted by Marc Hodak on November 17, 2008 under Movie reviews |
Someone needs to let director Marc Forster know that a Bond film doesn’t have to pace itself like a kaleidoscopic zebra stampede. There is such a thing as gratuitous action. Forster and the writers seem terribly constrained by the need to try to convince their audience that their main character is in mortal danger all the time. They toss up an endless series of close-shave death matches, and manic, nick-of-time escapes. When those become too predictable, they accelerate the pace with quick-cut scenes that become almost a blur. And then they blur them. And then add noise.
All this is basically a wasted, hopeless effort to overcome the thing that cannot be overcome in any Bond film–one’s certain knowledge that Bond can’t die. We know he can’t. No technical or cinematic wizardry can convince us otherwise. Really, they should just give up trying to convince us that Bond might lose a fight if they just throw enough unnamed extras at him, and instead provide some evidence of thoughtful, creative planning, and the exquisitely timed use of whiz-bang gadgetry that might allow us to suspend disbelief. Gives us back the clever Bond with cool toys.
Of course, the perennial problem with Bond flicks is the economic rationale supposedly motivating its villains. In this film, the Brits suspect that a shadowy organization fronting as a Big Green Project, led by the bug-eyed bad guy (played with admirable creepiness by Mathieu Amalric) is trying to horde something–like oil. Oil, you see, is critical to everything; so if someone can control oil, well, they can control everything.
I know what you’re thinking: but isn’t oil a fungible, globally available resource, so that if Russia or Venezuela simply stopped selling us their oil, we’d just end up paying marginally higher prices from less convenient producers, while they would make less money from less convenient customers? Posh. You merely have to assume a fragmented market. If we can’t get oil from one of our neighbors, the lights will simply go off.
At this point, one has to start wondering if this film isn’t a right wing conspiracy. A green, save-the-planet organization fronting for a cynical corporatist? A fragmented market for oil that plays into the hands of madmen? (Wasn’t that the mistaken rationale that got us into a pointless war?)
SPOILER ALERT below the fold
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Posted by Marc Hodak on under Executive compensation |
Remember the preemptive “greed baiting” over the last several weeks, those breathless reports about how much financial services executives were going to get in bonuses this miserable year? So called compensation experts have “gone through the numbers” supposedly showing that bonuses would be every bit as high as last year. These tinfoil speculations sent the likes of Andrew Cuomo and Henry Waxman into fits of outrage. My prediction to any reporter who asked (you’re welcome, Liz) was a bonus drop of 30-50% (among the survivors).
Well, in the case of Goldman Sachs, I was off by, oh, 100 percent. The firm is announcing today that their top seven executives will forgo ALL of their bonuses for 2008.
The top guys at Goldman are all mensch, and they have big kahunas risking the loss of talent to less politically savvy Wall Street sharks. But they know what’s good for the franchise, and are now putting tremendous pressure on their weaker peers (and they’re all weaker) by putting this out there right now.
Whaddya say, Mack? Are you willing to go another year without a bonus? Are you still tapping away to see how much Harry, Dick, and Jane should get (or Colm, Michael, Fabrizio…)? Save yourself the trouble. They aren’t going anywhere in 2009.
Collectively, Goldman’s munificent seven have sacrificed about $200 million on the altar of envy. I’m sure the politicians will take credit for the sacrifice, then take credit for the Spring rain that follows, when all they did was build the altar.
All I have to look forward to next Spring is a much simpler proxy statement.
Posted by Marc Hodak on November 15, 2008 under Collectivist instinct |
Hillary is apparently a top contender for Secretary of State. It’s hard for me to think about what would make this lady, the master of the politics of brute force, so worthy of being the top diplomat. Here is how someone close to her puts it:
“She could weld this world together,” said Susie Tompkins Buell, a Clinton donor and friend. “I think it would be amazing.”
At first I thought that this was just the kind of mindless blather that some of her supporters spout when they’re between thoughts about something they know anything about.
At the same time, it seemed hauntingly evocative of something said by Hannah Arendt:
It substitutes for the boundaries and channels of communication between individual men a band of iron which holds them so tightly together that it is as though their plurality had disappeared into One Man of gigantic dimensions.
Maybe the connection between “weld” and “iron” was too strong in my mind, given my background in materials science.
The “It” Arendt referred to was a condition she would name as “totalitarianism.” Here is perhaps the conclusion that cemented, if you will, her reputation as one of the foremost philosophers of the 20th Century:
By pressing men against each other, total terror destroys the space between them; compared to the condition within its iron band, even the desert of tyranny, insofar as it is still some kind of space, appears like a guarantee of freedom.
Totalitarian government does not just curtail liberties or abolish essential freedoms; nor does it, at least to our limited knowledge, succeed in eradicating the love for freedom from the hearts of man. It destroys the one essential prerequisite of all freedom which is simply the capacity of motion which cannot exist without space.
While it’s dangerous to summarize a thinker as complex as Arendt, she is, in essense, arguing that terror is a the ultimate tool by which the designs of individuals can be completely erased, to be substituted by the designs of a ruler working to implement some kind of ideology.
It’s almost impossible to discuss any politician’s fetish with “binding the people together” in the context of Arendt without risking someone invoking “Godwin’s rule” to end the discussion. But there is no mistaking the context of quotes like this:
We must stop thinking of the individual and start thinking about what is best for society. – 1993
We just can’t trust the American people to make those types of choices…. Government has to make those choices for people – 1993
We’re going to take things away from you on behalf of the common good. – 2004
Not to focus on Hillary, though, we’ve heard collectivist calls to action from our president elect, as well:
Our individual salvation depends on collective salvation. – 2008
And not to pick on Democrats, Obama’s Republican challenger weighed in with:
I can lead this nation and motivate all Americans to serve a cause greater than their self-interest. – 2008
But people seem to fall for it over and over.
Posted by Marc Hodak on November 12, 2008 under Self-promotion |
In a small step toward legitimacy, my Enron Scandal paper passed 1000 downloads today. I don’t check these things every day. (Honest.) I happened to be looking up one of my old papers and saw an even 1000 on the screen beneath my top-ranked paper. I know it’s podunk stuff in the academic world (real academics have a dozen papers with over 1000 downloads, many in the several thousands), but I’m excited by the notion that my creation has attracted 1000 viewers. I hope they liked it. Kurt Eichenwald, author of bestselling Enron tome Conspiracy of Fools liked it. Of course, his book was a major source for my document.
Posted by Marc Hodak on November 10, 2008 under Executive compensation |
When got back to my office, I got a message about an invitation from the Drum Major Institute to attend a panel discussion they’re having on “Say on Pay.” Here is the blurb from their web site:
As compensation for top corporate managers has skyrocketed, even executives who mismanage their companies or demonstrate mediocre performance often receive lavish pay. Blockbuster Inc., led by CEO James Keyes, is at the forefront of efforts to provide greater accountability to shareholders. In March 2008, Blockbuster’s Board of Directors voted to grant shareholders an annual non-binding vote on executive compensation. Beginning in 2009, shareholders will directly advise the board on whether they approve of the pay levels of the company’s top executives. A majority of Blockbuster shareholders, headed by the New York City Employees Retirement System, first called for a ‘say on pay’ in 2007. In Britain, laws requiring say on pay have been credited with reining in exorbitant CEO retirement packages. A small number of other U.S. companies, including AFLAC and Verizon, have also adopted the reform.
Well, I think it’s clear that this narrative presupposes that CEO pay is too high (my read of “lavish”) because of a lack of accountability at the board level, and that “Say of Pay” can provide that missing accountability. In medicine, prescribing a cure without regard to the validity of the diagnosis would be called “quackery.” In politics, it is often called “good governance.”
I was struck by a couple of sentences in particular:
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Posted by Marc Hodak on November 7, 2008 under Unintended consequences |
Coyote found a concrete instance where the mere threat of possible unionization may have killed jobs. A Honeywell plant near Phoenix had, a couple of times over the last decade, barely prevented unionization in secret ballot voting. Well, a day after Obama and the Democratic horde won the election, the company announced it would shut down that plant and offshore 700 jobs.
Recall that Obama promised two things in his campaign. First, he has pledged his support for “card check” unionism, where the secret ballot is replaced by face-to-face cajoling. Second, he promised to penalize companies that “move American jobs overseas.” It’s not a stretch to believe that the Phoenix plant was a highly likely target for successful unionization. It’s therefore not a stretch to think that the company decided to move its operations to Mexico and the Czech Republic while it still had the freedom to do so.
It’s well documented that job growth in unionized companies is far slower than in non-union companies. Labor organizations will never track such a thing. They will track union vs. non-union wages or benefits–the visible benefits of union negotiations. But they don’t have to track job growth. Everyone knows that within any industry–airlines, trucks, auto manufacture, etc.–job growth is much higher among the non-union firms. Everyone knows that unions spend much of their energy trying to prevent further job losses. This is just economic common sense.
The problem for workers is that, while they can see the tangible gains of unions in terms of wages and benefits, they can’t see all the jobs that weren’t created, or were created off shore because the union priced them out of the domestic market. The market penalty of unionism is largely invisible. Of course, the market is working whether workers or politicians or anyone else notices it or acknowledges it. But it is quite possible, if not likely, that Obama’s outspoken support for pro-union policies led to the loss of hundreds of jobs in Phoenix, and goodness knows how many more in the rest of the country between now and the point where he takes those rights away from workers and companies.
Postscript: Those with the jobs, and therefore union votes, have a strong incentive toward blindness about this feature of the market. They could care less about those without the jobs, especially if the reason those jobs aren’t there is because their jobs pay too much. They only care to the extent that the lack of labor competitiveness might affect their job.
