Posted by Marc Hodak on October 6, 2009 under Invisible trade-offs, Reporting on pay | 
This morning’s headline in the Wall Street Journal made me wipe my eyes and blink a couple of times to make sure I didn’t wake up in some sort of Kafkaesque twilight zone.:
Pay Czar Targets Salary Cuts
That appeared right above a headline about how the government wants to restrict gifts to bloggers. Nice.
Relative to the title of this post, Pravda, of course, would have reported on the glorious plan of a commissar instead of a czar, but that is a fine distinction for our purposes. The more relevant distinction is that the pay czar story is really two stories. The nominal story is about a government official who has ideas about how individuals in private firms ought to be paid, when most everyone agrees that the way they had been paid is defective. It’s stated as a matter of fact problem-solution story. The second, more subtle story, is about a government official harnessing state power to implement his ideas. This is about the unstated premise that it’s a good idea for government officials to implement their good ideas about how people should be rewarded in companies representing a significant chunk of the economy. Those who read the nominal story in its narrow sense will say, “Hey, these measures only apply to firms with significant government investment.” True enough, but that ignores the trend in government intervention in pay practices over the past couple of decades under Republican as well as Democratic administrations. The intent about this pay czar’s reach is clear:
However, the Obama administration is hopeful that Mr. Feinberg’s pay structure will be viewed as something of a “best practice” and that other firms may voluntarily seek to use similar methods in determining compensation.
And what if firms don’t seek to do so voluntarily, and generally shrug off these suggestions as they have every other government suggestion for how to structure the pay of the most sought-after talent on the planet? The trend is not good.
Kenneth Feinberg is a bright guy. He claims to have the best interest of taxpayer-as-reluctant-owners at heart:
At a speech before the Chicago Bar Association last week, Mr. Feinberg said he will not have done his job if companies react to his decisions by saying “that’s great, we’re going to lose all our people and we’re not going to be competitive.”
But the commissars who drew up the Soviet five-year plans wanted their companies to succeed, too. They wanted their economies to thrive. They considered it their patriotic duty to insure that success. For many of them, success was literally and personally a matter of life and death. But the commissars failed, and turned Soviet Russia into an economic basket case. Ken Feinberg has never designed a corporate incentive plan. He has never had his compensation ideas market-tested. But this morning’s headline reports his intent as if none of these things matter. All that matters is what was stated in the lead, that Mr. Feinberg is “clamp(ing) down on compensation at firms receiving large sums of government aid.” Because the people could not tolerate paying their proxy functionaries so much.
Posted by Marc Hodak on September 20, 2009 under Executive compensation, Reporting on pay |
The current debate over how bankers should be paid is actually two conversations conflated into one.
The nominal conversation is about elevated concepts, such as corporate governance and systemic risk. The Fed proposal is about regulating “compensation policies deemed to pose a potential threat to a financial institution’s soundness.” In fact, the discussion of governance and risk is simply a front for the real conversation driving public policy—envy, i.e., a less elevated concern about how much other people make and who gets to decide.
Governance, as a distinct topic, is too boring for the media to write about. On the other hand, how much other people make is quite interesting. But raw dollars is too crude a topic for our media elite to claim as an explicit journalistic interest. So the MSM satisfies this interest implicitly by conflating the governance and envy conversations in a kind of bait and switch. The bait is code words like “millions” and “outrage” in the headline or lead. Then, for the next fourteen paragraphs, they will discuss governance and risk, as if those considerations were actually driving policy makers and government leaders to the point where compensation overwhelms the agenda of the upcoming G20 talks. Finally, in the fifteenth paragraph, they will return to the crux of what’s driving the debate:
In the U.S., the Fed’s plan will further inflame the debate between those who feel it bank pay too high [sic] and those who resent Washington’s reach into the private sector.
“Pay too high” is a concern about envy, not governance, but even here the narrative is used to disguise envy by obliquely citing ‘those who feel.’
Read more of this article »
Posted by Marc Hodak on September 8, 2009 under Practical definitions, Reporting on pay |
Politicians and the media, working together to politicize the language, have grabbed onto a new phrase: the bonus culture. It’s a suitably nebulous phrase that conjures up bankers immersed in a world of money–our money–flowing through their homes and dinners and art, regardless of what happens to “working men and women,” of which they are not a part.
The definition of ‘bonus culture’ should be simple: an area of society where incentives are transparent.
Instead, we have this alienated view of money, and those who work with it, arising from the cargo cult mentality that endows money with a sense of magic, as if it flows toward certain people based on some dark art. It hearkens back to the medieval view of traders and moneychangers who grow wealthy without producing anything tangible as the inherent objects of suspicion, while the looters who walked around with swords or muskets and forcibly took money from their subjects were treated with a sort of reverence for their power.
You’d think that in this day and age, we’d have a healthier view of money as a medium of exchange and a store of value. You’d think that in a society where the vast bulk of involuntary transactions are tax collections, that those dealing without the threat of force would be regarded with a less conspiratorial view than those who rely on that threat. But it remains exactly the opposite: politicians are viewed with less suspicion than bankers. And the reason is that bankers live in a “culture of bonuses” while the financial incentives of politicians are far better disguised.
Posted by Marc Hodak on under Collectivist instinct, History, Reporting on pay |
People reading the news may be forgiven for thinking that we are having a kind of national conversation about executive compensation. In fact, we are having two conversations. One of them is about corporate governance. The other is about wealth redistribution by non-market means. Both of them sound like they’re about compensation because the word is used often in the story, but they are different.
Take this item headlined: Warning: Pay Gap Between CEOs and Workers Will Keep Growing
This is nominally about compensation. It has the words “CEO” and “pay” in it. In fact, this is a story about a study released by the Institute of Policy Studies, which is a progressive organization dedicated to revamping society along socialistic lines. They simply hate the idea that some people make a lot more than others. Governance is simply a side show for them:
Governance problems do need to be resolved,” notes IPS Director John Cavanagh. “But unless we also address more fundamental questions – about the overall size of executive pay, about the gap between the rewards that executives and workers are receiving – the executive pay bubble will most likely continue to inflate.
But. It’s about the size of pay. A colleague of Cavanagh wrote:
Shareholders have no reason to begrudge executives like these their fortunes. But the rest of us do.
For IPS, it’s not about the shareholders. It’s about social justice, which is code for democratizing pay. I get to vote on how much you make, and you get to vote on how much I make, regardless of how we “vote” in our revealed preferences via the market place.
What annoys me about this is not the nominal aims of the progressives. I too would prefer a world with less extreme distributions of income. What annoys me is that this sentiment is not really about income–it’s about state power versus market power–it’s simply reported as if it’s about income.
Posted by Marc Hodak on August 27, 2009 under Reporting on pay |
First France tries to chase its traders over to Switzerland. Now Great Britain is doing the same.
In the magazine interview, Mr. Turner said that London shouldn’t worry about losing banking business, in part because the U.K. economy has become too dependent on financial services and in part because “London is a classic cluster and it will remain the dominant time zone in Europe.”
If that sounds like a second-best academic, your hunch is confirmed in the next paragraph:
An FSA spokeswoman said his statements were merely part of “an intellectual debate” and that “any specific policy proposals are for politicians to debate and decide.”
That’s kind of a relief. “This is just an academic exercise, folks. Our regulators are just flapping their jowls.” I guess some things are worth reporting, after a fashion. At least you know where the academic stands. No one knows what the politicians believe, except that they wish to get reelected, and will compromise most of their other beliefs to preserve that one. Sarkozy may think that capping bankers’ pay is batsh*t crazy. But if he has the choice between keeping his job and losing half of the traders in France, the money men are always expendable.
Posted by Marc Hodak on August 24, 2009 under Irrationality, Politics, Reporting on pay |
Kenneth Feinberg is contemplating the serious issue of whether or not to disclose the names and compensation of the highly paid executives whose pay he is reviewing. On the one hand, there are personal privacy and security issues:
“One of my clients makes $25 million a year and drives a Honda,” said Eckhaus, of Katten Muchin Rosenman LLP. “He tries to lead a fairly modest life and he would be horrified if what he makes appeared in the paper. Not only would his neighbors know, but his kids would know, and it would affect his ability to raise his kids. These are people, not a circus sideshow.”
Douglas Elliott, a former JPMorgan investment banker now with the Brookings Institution think tank in Washington, said releasing names and salaries of top executives could be intrusive and would not serve a public good.
“When you turn it into specific names, it’s kind of voyeurism,” Elliott said. “It’s not the principles anymore, and I think it does violate their privacy.”
He also said too much disclosure could prompt top executives to resign, harming companies as they try to recover and repay the government.
Very good points all. On the other side, you have Democratic Representative Alan Grayson:
Grayson told Reuters he is unsympathetic to the argument that the pay czar should not name names.
“If this is the same top talent that caused their firms to be destroyed and put the entire U.S. economy at risk, I wish they would leave the firms and leave the country,” he said.
Read more of this article »
Posted by Marc Hodak on August 17, 2009 under Executive compensation, Reporting on pay, Stupid laws |
…in the war for global banking talent:
“Aggressive compensation systems – amongst many other factors – contributed to the financial crisis by creating false incentives,” BaFin said in a statement. “In future, short-term profitability must play no further role in the variable components of the compensation of managers and employees who can establish high risk positions.”
The commanding tone of this pronouncement makes one believe that they have a working definition of “aggressive compensation systems” and some proof that they contributed to the financial crisis. They don’t.
The most startling aspect of these new regulations is the claw back provision for bets that go bad:
“Variable components of compensation must also take into account negative future developments,” Lautenschlaeger said. “With this, risk takers are to share not just in the profits, but also in the possible losses.”
There is no distinction between whether the bets that led to those losses were good ones or bad ones at the time they were made, only whether or not they turned out bad. Consider the following scenario: A banker sees an opportunity to bet $100 on a project that has even odds of either doubling his money or losing half of it. He would be a moron banker to pass up this bet. The bank wants to encourage him to find these bets and make them. They have two choices on how to reward him. They can either reward him based on the expected value of the bets, i.e., $25 in this case, or they can reward him based on whether the bet actually succeeds of fails, i.e., plus $100 or negative $50. A reward based on the latter has a much higher cost to the bank since it must compensate the banker for the added uncertainty.
According to the new rules, the bank must adopt the latter, costlier scheme. They will have no ability to pay people bonuses for their expected value contributions if they must claw them back if good bets sour, as they often do in the business world. And that latter scheme has additional problems in the real world besides cost. In some cases it may be easier to estimate the quality of a particular bet than to know its actual result if the results of that bet get tied up into the results of other bets from the same book. In some cases, the results of particular bets, even if they can be tracked, may not be known for several years, possibly after the banker has moved onto another position. Delaying bonuses also significantly increases compensation costs since one must be compensated for deferring compensation. If you don’t defer the compensation, and you have to take it back later, then you have the logistical issue of recouping compensation already paid–in essence reaching into someone’s personal savings to get back the cash.
What did the regulator say to all these problems?
For the first time, Bafin has established provisions for clawing back money from individual employees if the deals they do turn sour. In so doing, Lautenschlaeger acknowledged that she had overridden concerns from the banks that such provisions are unworkable.
The English translation for Lautenschlaeger’s response begins with an “f” and ends in “you.”
Ironically, the banks’ reactions to these provision are almost certain to both increase the costs to the banks, and also reduce the alignment of their bankers. That’s what happens when you base prescriptions on the wrong diagnosis.
Depressingly, the reporting of this news has basically read like BaFin press releases.
Posted by Marc Hodak on under Executive compensation, Reporting on pay |
The speaker is “Pay Czar” Kenneth Feinberg. The law he is referring to are the compensation clauses under the TARP legislation passed last September and February.
What does “anything is possible under the law” mean? I thought laws were supposed to delineate what was not permissable. Feinberg clarifies what “Pay Czar” means:
“The statute provides these guideposts, but the statute ultimately says I have discretion to decide what it is that these people should make and that my determination will be final,” Feinberg said.
“The officials can’t run to the Secretary of Treasury. The officials can’t run to the court house or a local court. My decision is final on those individuals.”
Man. I wonder if this means that he can also fend off the green-eyed monster we call Congress?
Posted by Marc Hodak on August 13, 2009 under Executive compensation, Politics, Reporting on pay |
The Screwed Seven must submit their pay plans to the horribly nicknamed Pay Czar by Friday. The reports about this have fairly captured his situation:
Many believe Feinberg will be squeezed between public fury over outsized bonuses on one side and what is best for companies trying to compete and retain talent in a marketplace that demands million-dollar salaries on the other.
If Feinberg rules that big compensation packages are mostly fair, lawmakers may assail him as the tool of corporate interests. If he tries to strike down salaries, boards and shareholders may blame him for chasing away the rainmakers.
The implication, here, is that our lawmakers consider corporate interests expendable. In the context of taxpayers’ interests in these particular corporations, this would make Congress a lousy fiduciary, but we already knew that.
Once again, this Congress has placed itself to the left of the administration:
“I don’t think the American people begrudge that people make big salaries, as long as they’re not jeopardizing the goodwill of the public in doing so,” White House spokesman Robert Gibbs said Wednesday.
Contrast that with this concern from Nancy Pelosi and Barney Frank:
[TARP recipients could] “enrich their executives while deferring repayment of the federal financial assistance that helped them avoid financial catastrophe.”
As if preventing their “enrichment” will help anyone avoid financial catastrophe.
The fact that Feinberg is doing this job for free is not reassuring. On the other hand, I know they could not have paid me enough to do it. I get rather claustrophobic in the crevices of shifting boulders.
Posted by Marc Hodak on August 6, 2009 under Executive compensation, Reporting on pay, Unintended consequences |
Would you like to squeeze this?
Another bank, Wells Fargo, has decided that they, too, will not sacrifice competitiveness for the sake of making their politicians feel good; they are dramatically raising salaries of their top executives:
“We must pay our senior people fairly,” said Melissa Murray, a Wells Fargo spokeswoman. “We are using stock to increase their salaries to keep the pay of these leaders closely tied to the success of the shareholder.”
Wells Fargo’s move illustrates the tricky mix of politics and government oversight that TARP recipients must navigate in running their businesses. Banks maintain that they must continue to offer competitive pay packages to avoid losing key talent. To do so, some are skirting rules designed to limit such pay.
The intent of the rules was certainly to limit such pay. The companies are skirting the rules in the same way that an animal will skirt a trap designed to make it dinner. Unfortunately, most readers are likely to interpret “skirting rules” as one of those nefarious things that dishonest business people do rather than the logical, predictable response of a market to ill-conceived regulations.
How much of an increase in salary did these silly rules induce? Over a 600% increase, in this case:
The Wells Fargo board approved a new salary of $5.6 million for Mr. Stumpf, who was originally slated to earn $900,000 in base salary this year. Last year, Mr. Stumpf made more than $9 million, $7.9 million of which came in the form of stock options.
My favorite line of this article:
Elizabeth Warren, chairman of the Congressional Oversight Panel, which oversees TARP, declined to comment.
Indeed.
