The Dollar-A-Year CEO

Posted by Marc Hodak on July 28, 2013 under Executive compensation, Governance, Invisible trade-offs | Be the First to Comment

I am often dismayed by the popular response to “dollar-a-year CEOs.” These bosses give the media a feel-good story:  You don’t have to be greedy.  You can be a not-so-fat-cat!

Apparently it’s not just John Q. Public–several times removed from the real world of compensation governance–that buys this stuff. Just last week, a tech company CEO in a WSJ “expert” panel praised the dollar-a-year standard, and the swell guys and gals who adopt it, saying that all CEOs should be so virtuous.

These are people that are out to change the world. They are owners. They are builders. They bleed for their company and what they are creating. It’s not about the money.

His examples were Steve Jobs, Larry Ellison, Mark Zuckerburg, Meg Whitman, Larry Page.  Do you see a pattern (besides all the money)?

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Of capital and kings

Posted by Marc Hodak on July 23, 2013 under Governance, History, Invisible trade-offs | Be the First to Comment

The birth of a new British heir once again causes us governance geeks to scratch our heads at the succession mechanism formally known as primogeniture, the winner-take-all system whereby the first-born (generally male, but not always) becomes heir to substantially all of the parents’ titles and property. In the context of a monarchy, has anyone ever believed that such a mechanism would consistently yield good leaders?

The answer, of course, is “No,” but the question assumes the wrong purpose. In fact, primogeniture did not evolve as a way to select a certain quality of leader; it evolved as a way to enable society to accumulate capital.

For most of history, it was extremely difficult to preserve and grow capital from one generation to the next. Before the 19th Century, the lives of ordinary people–how they labored and what they had in their homes–were virtually indistinguishable from that of their grandparents. Things were hardly better among the aristocracy. For them, accumulated property was basically an invitation to plunder. Consequently, from the Fall of Rome to the Industrial Revolution, the vast majority of capital created by the upper classes was in the form of weaponry, and most of that was consumed in battle. It was in this neo-Hobbesian war of all against all that primogeniture evolved as a way to select kings.

The customary transfer of allegiance of powerful nobles from their king to a royal heir greatly reduced the odds of a civil war. Societies that tended to avoid civil war tended to accumulate far more capital. More capital made them more powerful, economically and militarily, creating a dynamic that eventually led to the institution of monarchical succession via primogeniture spreading throughout most of the world.

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Governance regulations hurting the labor market for start-ups

Posted by Marc Hodak on February 28, 2011 under Invisible trade-offs, Unintended consequences | Be the First to Comment

A story today describes how start-ups are having problems:

Internet start-ups across Silicon Valley are struggling to compete for talent amid the investment frenzy gripping Facebook Inc., Twitter Inc. and Zynga Inc., with many smaller companies beefing up pay and recruiting and wading into the private-company share market to keep pace with their larger rivals.

Silicon Valley is full of world-class engineers sleeping on futons and living on ramen noodles.  These (mostly young) people accept company paper instead of the decent cash that their talents could easily justify for the privilege of toiling 14 hours a day in untested ventures.  This system depends upon well-functioning equity markets to secure this manner of devotion.  Public equity markets enable those making the gamble to see the payoff sooner.  Bill Gates has said that Microsoft never needed the public capital for investment in growth; the company went public to so that its 10,000 paper millionaires could become actual millionaires.  Many of them would go on to fund or work in other start-ups, and their example has fueled many more.

Today, our IPO market is broken.  That avenue of exit has been crushed by the weight of governance regulations, especially Sarbanes-Oxley.  These rules were intended to restore confidence in our public markets.  They have, instead, prevented ordinary people from investing in maturing companies like Facebook, Twitter, or LinkedIn, and hampered the ability of companies like that to attract the talent they need to get going.  Such companies are now forced to go to private markets for liquidity, markets that are far less accessible to smaller firms than IPOs used to be.

We will never know how many Microsofts or Apples have not been able to get off the ground since 2002–the year SOX was passed–or may not in the future, because of the higher cost of securing needed talent.  Unfortunately, the people who proliferate these rules like Topsy are not accountable for what doesn’t get created.

A story of doctors following the money

Posted by Marc Hodak on December 8, 2010 under Invisible trade-offs, Patterns without intention | Be the First to Comment

Here’s an article about the use of a new technology to treat prostate cancer:

Roughly one in three Medicare beneficiaries diagnosed with prostate cancer today gets a sophisticated form of radiation therapy called IMRT. Eight years ago, virtually no patients received the treatment.

The story here is about what is behind that trend, i.e., the fact that some groups stand to gain financially from the adoption of a new treatment that has proven at least somewhat effective.

Taking advantage of an exemption in a federal law governing patient referrals, groups of urologists across the country have teamed up with radiation oncologists to capture the lucrative reimbursements IMRT commands from Medicare.

Under these arrangements, the urologists buy radiation equipment and hire radiation oncologists to administer it. They then refer their patients to their in-house staff for treatment. The bulk of Medicare’s reimbursements goes to the urologists as owners of the equipment.

While I’m obviously a big fan of perverse incentives stories, I know enough about them to be wary of narratives that only look at surface incentives and behaviors without getting down to the root causes.  This story, in particular, blames doctors for rationally reacting to the pricing structure created by Medicare, which is like blaming children for chasing a Good Humor truck down the street that is accidentally dropping ice cream boxes out the back.  This becomes a story of “self-referral,” with greedy doctors pushing patients into more expensive treatments.  One doctor whom the writers place in the role of “defense” encapsulates his position as:  “Our credo in medicine is not, ‘spend the least money,’  It’s, ‘first do no harm.’ ”

The story then goes after the politicized decision making on how reimbursement rates for these treatments were set, and how congressmen caught between physician and patient groups have no incentive to control costs.  All those costs, of course, are ultimately born by the taxpayer.  The story ends with the plaintive quote:  “how are we going to pay for that?”

Then it stops.

I once recall reading a story about profiteering in shoes in the Soviet economy.  For the benefit of its western readers, the story began with the fact that in the Soviet system the supply and distribution of shoes were largely controlled by the state.  It described how bad the shoes were, how hard it was to get them, how the state blamed “profiteers” for the shortages.  It described how bureaucrats were continually coming up with more and more rules to circumscribe the increasingly dysfunctional behaviors in shoe distribution, and how the scoundrels in the supply chain were continually working around those rules for their own enrichment.

What struck me was how a reader outside of the Soviet system, one who understood how a market-driven system could create an entirely different set of incentives and constraints, would read that story and say, “What a hopeless case.  They need to dismantle the state-controlled system,” but a reader from inside the Soviet system would react by blaming the scoundrels and bureaucrats.

It occurs to me now that any description of our current medical system has us blaming the scoundrels and bureaucrats, not the central planning system in which they operate.  And that is why journalists have taken up that narrative, even in the WSJ, and stopping before they question the system of treatment prices set by central planners, and paid for by anyone but the patients.

(Raising his hand) Pick me!

Posted by Marc Hodak on November 18, 2010 under Government service, Invisible trade-offs | Be the First to Comment

As the TSA begins offering U.S. citizens the choice between having their genitalia displayed on a screen or having them groped by an agent, a top TSA Administrator defends the intrusion with this question:

“If you have two planes, one where people are thoroughly and properly screened and the other where people could opt out of screening, which would you want to be on?” he asked.

Frankly, I think the choice above is a tough call because I put so little credence in the efficacy of our full-blown security theater, but I do appreciate at least some passenger screening.  But the question itself is simply a TSA administrator’s leading question, a form of intellectual coercion, designed to justify the physical abuse.  He could have asked his question a million different ways that would better reflect the sensibilities of the citizens whose intelligence he insults:

1)  “If you have two planes, one where people are thoroughly and properly screened*, and the other where they they are screened marginally better than they were in the 1990s, which would you want to go on?

2)  “If you have two planes, one where people are thoroughly and properly screened*, and the other where they just had random bag searches and well-trained agents ready to ask additional questions, which would you want to go on?

3) “If you have two planes, one where people are thoroughly and properly screened*, and the other where certain fliers were non-randomly selected for screening, which would you want to be on?” he asked.

I know the last alternative is an invitation to racial profiling, but as someone with somewhat Moroccan features, I might still choose an airport security system where I’m slightly delayed going through it, but I’m unlikely to be delayed behind Pa Kettle, Grandma Myrtle, and little Bobby and Susie, waiting their turn to be searched for shoe bombs and box cutters.

And if the government really had any conviction around that administrator’s question, it would allow the airlines to give their passengers a choice among screening regimes, including opting out, to test the regulators assumption that people would tolerate any intrusion in the name of safety.

* I.e., told to remove their shoes, separate their laptops from their other baggage, present their liquids in plastic bags of an approved size, and parade before a denuding apparatus…

“The central question…”

Posted by Marc Hodak on August 16, 2010 under Invisible trade-offs, Unintended consequences | Be the First to Comment

David Leonhardt suggests that “The part of the [financial services overhaul] law that will directly affect the most people will be the new Consumer Financial Protection Bureau, which has already been the subject of heated debate. And the central question facing the bureau will be how to distinguish between corporate malfeasance and consumer frailty.”

This is how I would expect a NYT columnist to see the central question, i.e., as a distinction that experts must make about when a financial instrument or transaction goes from being merely too hard for someone understand to being deceptive.  While many pundits and readers no doubt share this view of “the central question,” I think it distracts us from far more interesting questions:

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“Your problem is you aren’t thinking like wastrels or thieves”

Posted by Marc Hodak on July 15, 2010 under Invisible trade-offs | Be the First to Comment

That’s the problem with conservatives.  They just don’t get it with the stimulus.

Holland, Mich., where Mr. Obama visits Thursday, has seen a big infusion of cash from the president’s economic stimulus plan: hundreds of millions of dollars for new automotive battery plants, tens of millions for schools, as well as millions more for housing, small businesses, university research and transportation.

Yet many in the region of 260,000 people, struggling with 12% unemployment, are skeptical the federal spending has made an impact.

“I wish he’d save his money and not come to Western Michigan,” said Becky DeWind, co-owner of a company that received nearly $95,000 in stimulus money to neutralize radioactive contamination in groundwater—her only U.S. business in a year. “They were just swiping a Chinese charge card for it anyway, and my kid’s got to pick up the tab.”

See?  They just aren’t seeing the benefits of all that stimulus cash, even when it’s right before their eyes!

“I just don’t know if people are seeing it yet as fully as I’m seeing it,” said Michigan Gov. Jennifer Granholm, a Democrat, referring to effects from the stimulus.

Actually, Ms. DeWind is seeing it more fully–too fully.  She’s not only seeing the immediate, visible benefits of the spending; she’s also looking ahead at how the bill will get paid.  Ms. DeWind’s problem is that she isn’t appreciating the stimulus through the eyes of a wastrel, as someone happy to get the cheese if her kids are picking up the tab.

“This is one instance where you can see job creating coming from it, but again…at what cost?” said Republican Jay Riemersma, a former pro-football player who is running for Mr. Hoekstra’s House seat. “People don’t want government stimulus and government spending…In their mind we’re mortgaging their future and their grandchildren’s future.”

Of course, Ms. DeWind and Mr. Riemersma are not entirely correct.  They are overstating their case.  Their kids and grandkids are on the hook for only a portion of those sums spent on her particular business or community.  Really, it’s other people’s kids who will have to pick up the rest.  So even Ms. DeWind and Mr. Riemersma are not seeing things as fully as possible.  They aren’t just missing the wastrel view of things, they’re also missing the thieving mentality needed to fully embrace the stimulus.

So, what are the Democrats doing to combat this deficient view?

Faced with such opinions, the White House and Democrats say they must keep pressing their points—one town and one project at a time.

This, of course, misses the point.  That’s the strategy you follow if the benefits of the stimulus were invisible to these people.  That’s the strategy assuming these people are too stupid to see what’s right before their eyes.  Wrong strategy.  They see the benefits, but they also see the costs.

“Sometimes you go into a conversation knowing someone’s going to come out with a certain perspective, no matter what you put before them,” Gov. Granholm said, expressing frustration. “You’re not going to be able to resolve that in one session.”

True enough, Jen.  True enough.

Blind acceptance of government heroics

Posted by Marc Hodak on June 16, 2010 under Economics, Invisible trade-offs | Be the First to Comment

Alan Blinder, former Vice Chair of the Fed and Princeton economist, takes that school’s reputation down another notch in his panting defense of the the government’s performance during the recent financial crisis–particularly since President Obama took office.

The second landmark was the fiscal stimulus package that President Obama signed into law about four weeks into his presidency. Originally priced at $787 billion, it was later re-estimated by the Congressional Budget Office (CBO) to cost $862 billion. A huge waste of money, say the critics—even though most independent appraisals, including that of the CBO, credit the stimulus with saving or creating two million to three million new jobs…

Try to imagine any government spending a massive sum like $862 billion without creating or saving millions of jobs. More specifically, suppose peak-year spending from the stimulus bill was about $300 billion—which is roughly correct—and that our hapless government just sprinkled its purchases around at random. On average, each job in our economy accounts for about $100,000 worth of GDP. (We are a highly productive bunch!) So $300 billion worth of additional GDP should be the product of about three million more jobs. Do we really believe the stimulus produced only a small fraction of that—or none at all?

Try to imagine an economics department like Princeton giving an advanced degree for any candidate making such a silly argument.

Surely, Prof. Blinder can imagine a government like the Soviet Union spending a significant portion of their country’s GDP without producing any net jobs.  Or North Korea.  Even less communist countries like France and Greece who have spent public money like drunken sailors have not really created any net jobs.  In fact, the amount of jobs a country creates is just about inversely related to the amount of its GDP spent by its government.

Blinder is trying to trick the reader when says “jobs.”  He means gross jobs, not net jobs.  If I took $10,000 from ten people, and gave it to someone to spend a year digging ditches and filling them up again, that would look like a job “created” in Prof. Blinder’s world.   The fact that the $100,000 was not spent by its original owners to support jobs in dozens of grocery stores, clothing stores, car shops, etc. apparently doesn’t enter into his calculation.  An economist worthy of the name accounts for such secondary consequences of the policy they are defending.  (BTW – The fact that the money is borrowed instead of taxed doesn’t quite save this argument.)

The reality, of course, is that our hapless government did not sprinkle its largess at random, and it did not target its spending toward the areas of highest unemployment.  It funneled much of it to its preferred constituents/supporters in the most politically rewarding way, just as any government would do.

Why would an acclaimed economist like Alan Blinder resort to such sophistry?  Because the economics profession unfortunately does not distinguish between “economics” as a science, with the maddening circumspection that scientists must display in order to retain their reputations, and “economics” as advocacy, which appears to forgive the most unscientific assertions when made for a partisan cause.  Blinder wrote this garbage as an advocate, not as an economist.

Bribing people with their own money (Pt. 3)

Posted by Marc Hodak on March 27, 2010 under Invisible trade-offs | Be the First to Comment

Bart Stupak gained recognition–and notoriety–for holding the health care reform bill hostage over his anti-abortion demands.  The 11th hour pledge by President Obama in the form of a promised executive order to meet those demands sealed Stupak’s support, and passage of the landmark bill.  Stupak’s stance has infuriated folks on both sides of the abortion debate.

The pro-life faction considers an executive order to be a lame bulwark against a law that otherwise allows federal subsidies for abortion, and feels betrayed:

Michigan for Life took away the endorsement he has enjoyed for 18 years.

The staunch liberals, who generally favor abortion-rights, also feel jacked around:

“The fact that he was willing to threaten health-care reform for this narrow, pro-life issue just burned me up, and it had meant he had lied to us.”

Well, this post is not about health care or abortion.  It’s about how Stupak will win re-election despite all of the animus directed against him from both sides, including the high-profile defections of powerful supporters.

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A new Senate disclosure proposal

Posted by Marc Hodak on March 24, 2010 under Collectivist instinct, Invisible trade-offs, Politics, Stupid laws | Be the First to Comment

The Senate Banking Committee is now taking up the Dodd bill to re-make the financial services sector more into the image of how the government thinks it should be run, e.g., more beholden to Congressmen.  Senator Menendez (D-NJ) offered an amendment to include disclosure of pay disparity, i.e., the ratio of CEO pay to the pay of the average (non-CEO) employee in the company.  It’s clear that this amendment is meant to inflame passions about CEO pay, and nothing more.  It won’t change what CEOs are paid because the premise behind this amendment, like so much else about pay regulation–that CEOs are paid arbitrarily high amounts–is wrong.  CEOs are, on average, paid what the market says they’re worth, a law of supply and demand that Congress cannot rewrite or amend, only distort.

One of the many possible distortions that come to mind would be an increasing trend to outsource low-skilled (and, therefore, low-paid) help, either to temp or admin agencies, or overseas.  That would help reduce that ratio.  It would also help to bring in-house the employment lawyer who will have to make the silly legal distinctions between who is an “employee” for the purposes of this bill.   Would a part-time worker be included?  Interns?  A lawyer skilled at such useless arcana would presumably bump up the average.

Hey, Senator, if you’re looking for useless ratios, why not mandate disclosure of the highest price product sold by a company versus its average priced product?  Or something slightly more productive like the ratio of the highest tax versus the average tax jurisdiction they operate in?

HT:  Broc Romanek