Posted by Marc Hodak on January 31, 2009 under Futurama | 
It think the biggest problem I have with the McCaskill proposal for paying senior executives like the president is that it gets it all backward. Most of what executives get is variable compensation. Say what you want about pay-for-performance, but when was the last time senior government officials saw their pay drop 44 percent for a bad year? It think the president and congress should get much higher pay, but most of it variable, based on performance.
Since I design this stuff for a living, let me propose something simple and definitive, something that points us in about the right direction. How about:
– A target bonus equal to current salaries, e.g., $400,000 for the President, and something similar for every senator and congressperson,
– A bonus pool for these 536 elected officials that adds $1 for every $1,000 in budget surpluses to those target bonuses, and reduces them by $1 for every $1,000 in deficits. (I’m talking cash surpluses and deficits; none of this “off-balance” sheet stuff that only the most Enron-friendly accountant would accept.)
So, a $230 billion surplus, like Clinton and the Republican congress produced in 2000, would create a bonus pool of $230 million, to be divided among our president and legislators in proportion to their respective salaries. That would average about $430,000 per pol, with a little more for the Prez and little less for a House member. Remember, this would be on top of their respective target bonuses.
On the other hand, if they bring home a Bush-sized $400 billion deficit, their bonus pool would be -$400 million, which would wipe out their target bonuses. Don’t even ask what a $2 trillion deficit would do.
Actually, let’s ask. That would create a negative bonus of over $2 million per pol. Should we institute clawbacks? Or perhaps do it like the hedge funds that we love to demonize, and have our new bonus babies earn back the negative amounts before they can get more bonuses in the future.
I know my libertarian friends will complain that this will encourage tax increases as much as spending decreases, but I wouldn’t fret too much about that. We like to joke about the financial literacy of our elected representatives, but I think they are actually smart people, and will quickly realize what most of us economists already know, which is that they don’t control the lever of overall tax revenue nearly as much as they control expenditures.
And I solemnly promise not to complain about their massive layoffs of government employees while getting paid large bonuses. Not one peep.
Posted by Marc Hodak on under Revealed preference |
Senator McCaskill has proposed a ceiling on the pay of anyone working at a company taking government money–i.e., the same as our highest paid public servant, the President. The cap of $400,000 per year would include salary, bonus and retirement contributions. As usual, the Senator failed to think this through.
First of all, the president will get a pension of $200,000 per year when he leaves office. Even assuming he’s a two-term guy, the value of that retirement, if we calculate that contribution according to proxy disclosure rules, is about $400,000 per year. So, out of the box, McCaskill is offering an apples-to-oranges standard. Salary, bonus, plus retirement contribution for the president is about $800,000 per year, and much more if he gets the boot after just four years (so much for pay-for-performance).
On the other hand, this bill doesn’t appear to mention a limit on perks and other benefits, where an executive mimicking the president can easily begin to make up some ground. To begin with, there is the much-maligned corporate jet. The president has one. Actually, he has two of them, and each is tricked out with far more comforts and gadgets than the most audacious jet available to the average GM or Citibank CEO. In addition, the CEO should be entitled to a fleet of helicopters, as well.
Then there’s a housing allowance. To get something equivalent to Obama’s crib, a mammoth, historic mansion with sprawling acreage in the heart of a major city, would test the generosity of even the most spineless board of toadies. But let’s throw in, say, the top floor of the newly renovated Fairmont Plaza. Plus unlimited use of their entire staff, dining, and ballroom spaces. If you’re an auto company CEO, I don’t think the entire city of Detroit would offer an equivalent value, not that they would take it.
And if you think the post-retirement benefits of office were extravigant for Jack Welch, they don’t compare to this guy’s.
Posted by Marc Hodak on January 30, 2009 under Executive compensation, Politics |
OK, Wall Street collectively earned $18 billion in bonuses.
After the NY Comptroller’s report yesterday, BDS has come into full swing. President Obama gave a wag of his finger. Many in our anti-business media are piling on with psychobabble dressed up as analysis. Now, the Davos clique, striving for relevance, is chiming in. And check out how hot “b” can sound when enunciated by the babe in the MSNBC video.
The comptroller’s report itself did not contain the outrage it provoked. In fact, it noted that the lack of these bonuses had a material impact on the ability of the state and city to finance public services, reinforcing the truth of what P. J. O’Rourke once said about the value of the undeserving rich:
The worst leech of a M&A lawyer making $500,000 (he wrote this in 1992) will, even if he cheats on his taxes, put $100,000 into the public coffers. That’s $100,000 worth of education, charity or U.S. Marines.
What is shameful, I think, is the PR problem Wall Street has created for itself by mislabeling what it pays its producers as “bonuses.” Wall Street, like any other enterprise, depends on its talent, such as it is. And, like any other enterprise, the famous 80/20 rule applies–about 20 percent of its talent generates about 80 percent of its revenue. Rather than pay all its talent equally, they give these people base salaries that would barely keep them in a small Manhattan apartment. These folks need to earn up to their competitive level of pay through “bonuses” based on their production. So, whereas most people in the country think of a bonus as something “extra” awarded for very good performance, on Wall Street most of these bonuses resemble commissions earned by a modestly salaried salesperson. The I-banks like to call them bonuses because it sounds better to the employees they wish to attract and retain.
Unfortunately, it sounds the same way to everyone else. The point is, no one familiar with how sales people get paid would seriously think that paying them zero commission in a bad year makes sense (except, perhaps, Barney Frank). Hey, the guy sold only half of what he sold last year, but he didn’t sell nothing. He deserves his commission, which will add up to less than he could have made in a less risky compensation structure of mostly salary.
But all this outrage leaves out the most important point of any discussion of bonuses: as long as someone has a their compensation at stake via a commission, bonus, whatever, they will perform better at the margin. Wall Street had a miserable year. Believe it or not, it could have been worse. How much worse we won’t know until we eliminate all remaining incentives to preserve, if not earn, as much revenue as possible. When you take someone off the incentive curve, however it’s labeled, they cease to care how many more billions go out the door and down the drain.
They become like congressmen.
Posted by Marc Hodak on January 29, 2009 under Politics, Scandal |
1,736,219 people trusted this guy
Gov. Blagojevich asked the Illinois Senate that is acting as jury in his impeachment trial, “How can you throw a governor out of office who is clamoring and begging and pleading with you to give him a chance to bring witnesses in to prove his innocence?”
The answer kind of lies in the question, I think.
Hey, I don’t know if Blago is guilty or not. My prejudice of politicians says, “Of course he tried to use his public office for private gain. What are you thinking?” My prejudice of prosecutors and the press is along the lines of “Sentence first–verdict afterwards.” I’ve been teaching about scandal long enough to know that scandal is a creature driven by raw emotion. Nevertheless, I can’t summon the outrage about his proceedings. He and his accusers are in the profession they have chosen.
The whole spectacle serves as a great civics lesson about the wisdom of the constitutional prohibition on bills of attainder.
Posted by Marc Hodak on under Executive compensation |
Actually, Carl Levin and other congressional democrats want to raise those taxes, and it looks like Geithner will go along.
What? You haven’t heard any proposals for a tax increase being bandied around by the Obama administration? Well, no, Obama is not agitating for higher corporate taxes. Neither is Geithner, per se. But Geithner did tell Levin that he would “consider extending at least some of the TARP provisions and features of the $500,000 cap to U.S. companies generally.”
That would be a $500,000 cap on the tax deductibility of all senior executive compensation. Without any exceptions. At every public company in America.
This policy is nominally intended to penalize firms for paying their top executives “too much,” the premise being that boards can pay their top people whatever they feel like, so if Congress penalizes them for paying over $500K, they’ll think twice about doing so. Nice theory.
But what if the pay of executives is actually largely set by the market? What if the market actually values their services at $1 million, or $5 million, $10 million? Sure, there are many people worth much less, some of whom pass our laws, who can’t conceive or accept that certain people can be worth that much. But what if that were possibly the case? Then corporate boards would simply have to pay it. They would have to, in accordance with their fiduciary duties to their shareholders to secure the valuable talent. And their shareholders would be left coughing up the tax money.
In other words, the greedy executives negotiating for their out-sized pay packages won’t be the ones penalized by this exercise in congressional outrage. The companies will, via a much higher marginal tax rate on compensation. This will not be the first time a congressional bullet aimed at top corporate executives ends up hitting the shareholders. When it comes to executive compensation, Congress is the gang that cannot shoot straight.
In a time when most sober economists agree that cutting corporate taxes would be the single most effective way to help our struggling economy, it’s ironic that our top economic agent in government, the Treasury Secretary, would basically be supporting higher taxes on corporations.
Posted by Marc Hodak on January 28, 2009 under Invisible trade-offs |
Forbes has been highlighting the Consumer Product Safety Improvement Act in a series of articles by Walter Olson and Paul Rubin. These articles provide an excellent example of regulatory overkill, and how doing “for the children” invariably ends up doing it to those children’s parents, with little noticeable benefit for the children themselves.
Meanwhile, the safety nannies are keeping the pressure on. In a typical “it’s for the kids” logic, consumer advocates continue to point out that (a) lead is bad, and (b) the bill passed by an overwhelming majority (“we’re all parents and grandparents”). They also helpfully point out that some congressmen, responding to howls of protest, have already offered some advice to the CPSC on how to keep the implementation costs down, advice it’s not clear the CPSC will be able to follow. And don’t you know, those business ingrates are still not happy.
What the consumer advocates ignore is that this law simply makes no sense. It is founded on the principle that people who sell things to kids are indifferent to any injury they might cause. Toy makers, who completely depend on the happiness of their little customers, happen to know lead is bad. That’s why Mattel reacted the way they did when they found out. What keeps them awake at night is not the possibility of offending the effete sensibilities of the safety nannies, it’s the possibility of losing their customers.
And, also, if the number of congressmen rushing to pass a bill in hysteria is the measure of a bill’s virtue, then my troubled, liberal friends should have no problem with this.
Posted by Marc Hodak on under Economics, Executive compensation, Politics |
OK, Andy, you can stop hyperventilating now about how much certain other New Yorkers are making. The media and politicians have been fretting about how much Wall Street bonuses would be this year. The nominees were:
1) Up three percent (!)
2) It should be zero (Barney Frank)
3) Down about 25 percent (Alan Johnson, Wall Street comp specialist)
4) Down 30 to 50 percent (yours truly)
And the correct answer is (drumroll, please): down 36.7% per worker; 44% overall
I’d like to think that our AG’s obsession with how much these bankers make has contributed a little to this comeuppance. Alas, the market’s work is swift while the wheels of justice grind on at their deliberate pace. I’m sure Andy and Co. will press ahead, however, making it as difficult as possible to pay anything to those greedy bastards on Wall Street, tamping those bonus dollars down for as long as possible. Of course, Andy’s own job is secure. It’s up to his compatriots to figure out what to do with the $1 billion in state tax revenue and $275 million in city taxes that have evaporated with those bonuses.
Posted by Marc Hodak on January 27, 2009 under Executive compensation, Politics |
The drama over John Thain and Ken Lewis, Merrill Lynch and BofA, and the government’s loan to Wall Street, gets juicier.
Chapter One: Merrill hires Thain to salvage what he can of the troubled hulk. Thain sells off toxic loans to a hedge fund, and then the dolled up Merrill to BofA, for many billions, all just before the fan is hit by a stinking mound.
Having just preserved a boatload of value for his shareholders, Thain wants to make sure his team is rewarded for it. He knows that BofA’s management won’t be sympathetic to getting taken for a ride once they figure it out, and would probably stiff the Merrill team when given the chance, so he pays out bonuses to his guys in advance of the sale.
Chapter Two: BofA’s stiffs Thain. Then they fire him, and unleash a barrage of bad press about him. The media laps it up.
Chapter Three: Enter Andrew Cuomo. Never content to leave criticism of high profile executive compensation to others, Andy subpoenas Thain over the Merrill bonuses. Ahh, the mystery deepens. What is Cuomo alleging? Under what law is he acting? What public interest is he seeking to protect? (Silence.) Oh yeah. Nevermind.
So, while New York state waddles toward its own spectacular bankruptcy due to the epic profligacy and rampant corruption of its legislators, Andy is chasing headlines about the pay of certain executives of a then-completely-non-state-owned company who had just pushed their grateful shareholders out of the way of a hollow-point bullet.
Why doesn’t Cuomo follow the path of his famous predecessor, and go after easier targets?
Posted by Marc Hodak on January 25, 2009 under Economics |
For this quiz, your choices are:
1) Because of his well-articulate vision for a reshaped country
2) Because of deep voter concerns about the state of the economy and strong disapproval of President Bush
3) Because the media was in love with Obama
4) Because he bought it
Would it be redundant to say my money’s on #4?
My favorite aspect of the ’08 election, by far, was the irony that McCain, running as a reformer, was shackled to campaign finance reform spending limits that he himself had created.
Obama, on the other hand, was able to go for the big bucks, outspending McCain 2-to-1. I know, the fact that Obama could ignore spending limits after promising not to do so perhaps points to #3 as a contributing factor. But it still comes down to the cash, baby.
Posted by Marc Hodak on January 23, 2009 under Uncategorized |
One of Obama’s first policies on entering the White House was a freeze on all salaries above $100,000. WaPo estimates that this will save taxpayers about $443,000, which I suppose will help pay for the $825 billion spending package he is considering. But of course the president is not really doing this as a cost savings; he’s making a symbolic gesture, albeit one being paid by his staff. It’s designed to make the nation feel better that other people are suffering along with them. It’s also, no doubt, meant as an example for the greedy businessmen that populate our executive suites.
I don’t know if this is a good idea.
Ordinarily, freezing pay would create retention risk, i.e., it would cause some number of people to leave who might otherwise stay. Presumably, the people who are there now are the best people Obama could find to fill those positions at those salaries, so turnover of those people on the basis of pay makes it likely that they will be replaced by “next best” people. It doesn’t appear that any of the 120 staffers affected by Obama’s order are having second thoughts about joining the White House as a result of this freeze, at least not yet. And turnover would eventually happen at the White House even without a freeze–most of the top people working there are already sacrificing pay relative to what they could make in the private sector. But a freeze makes turnover more likely. So, freezing pay sends a message that Obama doesn’t really care to have the best people working for him.
A company normally loses a little bit of it effectiveness with higher turnover as a result of incrementally poorer business decisions by “next best” employees. That’s not true of every company, of course, but it’s true on average over a large number of competing firms. The White House, being a political entity, loses a little bit of political efficiency. Those who are a bit cynical of the value of government might not think this is a bad thing, but it might be.
It might be that the White House balances the wasteful tendency of the truly, monstrously wasteful arm of government–Congress. If Obama really wanted to control spending, he would have someone study the impact of a better run White House on overall government spending. He might conclude that saving taxpayer dollars actually suggests a raise for White House staffers, in order to get the best people able to check the impulses of Congress. I could be convinced.
