Posted by Marc Hodak on April 21, 2010 under Politics, Scandal | 
Few mechanisms have a greater impact on democratic governance than gerrymandering. Having incumbent politicians redraw districts entrenches them to the point that their reelection rate exceeds 95 percent. To paraphrase Yakov Smirnoff, in gerrymandered districts the voters don’t choose their representatives; the representatives choose the voters.
Gerrymandering enhances the power of political parties since all of the action is in the primaries, and the general election is a forgone conclusion. Many districts throughout the country have not changed party hands in decades. Thus, any challenges to gerrymandering have been briskly opposed by the parties even more than by the incumbents. In fact, the more talented politicians, the ones who could win in competitive elections, would likely benefit from reform since it would bring them out from under the thumb of their party bosses.
It’s hard to imagine a circumstance where the parties that control the redistricting process would agree to reforms that would reduce their power. But such a circumstance appears to be taking shape in New York. New York’s legislature is arguably the most dysfunctional in the nation. It is legendary not only for its brazen corruption, but for the open institutionalization of this corruption. After a string of scandals, the door may now be open to a reform movement that is attacking this corruption at its root by proposing to eliminate gerrymandering.
A coalition of brand-name New York politicians and good-government groups are getting every gubernatorial candidate to promise, in writing, that they will only sign off on a redistricting plan drawn up by a non-partisan commission. Whether or not the elected governor will actually veto anything less than that remains to be seen. Whether the governor’s veto of anything less will stand in a gerrymandered legislature remains to be seen. One has reason to be hopeful on the first question. The leading candidate for governor is Andrew Cuomo, despite the fact that he hasn’t officially announced his candidacy. Andrew’s father, former governor Mario Cuomo, is one of the leaders of the reform campaign. After all, it’s no great honor to be lord of a cesspool.
Posted by Marc Hodak on April 16, 2010 under History, Unintended consequences |
The top marginal tax rate in post-war America on income over $400K was so high that anyone making large, but lumpy income would have a strong incentive to insure that the lumps were spread out across tax years:
The 1950s was the era of the 90 percent top marginal tax rate, and by the end of that decade live gate receipts for top championship fights were supplemented by the proceeds from closed circuit telecasts to movie theaters. A second fight in one tax year would yield very little additional income, hardly worth the risk of losing the title. And so, the three fights between Floyd Patterson and Ingemar Johansson stretched over three years (1959-1961); the two between Patterson and Sonny Liston over two years (1962-1963), as was also true for the two bouts between Liston and Cassius Clay (Muhammad Ali) (1964-1965). Then, the Tax Reform Act of 1964 cut the top marginal tax rate to 70 percent effective in 1965. The result: two heavyweight title fights in 1965, and five in 1966. You can look it up.
Of course, tax-driven behavior continues to create unintended consequences. In a lecture I gave today in Switzerland, I pointed out how the U.S. government’s elimination of tax deductibility of salaries over $1 million created a growing shift in the mix of executive pay from salary toward bonuses and equity. The mix went from about 70/30 (salary versus bonuses/equity) before the tax law to about 10/90. This change in the mix of pay contributed significantly to the huge growth in total CEO pay we saw in the ensuing ten years. And that is how American tax policy intended to reduce CEO pay actually led to its increase.
Something about other people’s high pay just drives congressmen a little nuts.
Hat tip: Marginal Revolution
Posted by Marc Hodak on April 13, 2010 under Executive compensation, Reporting on pay |
People intuitively understand “you get what you pay for.” People get that, for a given price, you can either get an extra thousand square feet of space or a view of Central Park, but not both. Or, if you’re dealing with Lee Iaccoca, you can get Corinthian leather but not power doors and windows. Persuasive negotiation only gets one so far.
But when it comes to CEO pay, people pretend that trade-offs don’t exist. They presume that CEO pay is arbitrarily high based on the feckless disposition of the board, and that the perks that rile the mob so much, and presumably have value to the executive, should therefore be arbitrarily banished without a second thought. So, they pretend to be surprised when the Abercrombie & Fitch CEO was denied personal use of the corporate jet and, instead, paid more in cash:
The high-priced teen retailer amended the employment agreement of Michael Jeffries, long-time chief executive, to limit his company-covered personal use of the corporate jet to $200,000 per year. The CEO would have to reimburse the company for any use over that amount.
Previously, Mr. Jeffries was entitled to unlimited personal use. From 2006 to 2008, he booked an average of about $850,000 a year worth of personal travel on the corporate jet. In 2008 alone, he tallied roughly $1.1 million worth of personal travel on the jet. In exchange for agreeing to the limitations, Mr. Jeffries will receive a lump-sum payment of $4 million. The agreement requires Mr. Jeffries to pay back a portion of that money should he choose to leave the company before Feb. 1, 2014.
So, why would A&F’s board do this? Because if you take something away from someone you need to keep, you need to replace that with something else, and cash is a useful substitute. Now, keep in mind that when the CEO chooses to fly Delta, the corporate jet is probably sitting idle, so that “$850,000 a year” cost is partly an accounting fiction. Or, if he continues to fly on the corporate jet at the same pace as before, he will simply be paying back about 75 percent of what the company paid him. The other 25 percent equals about half of the extra taxes the executive must pay to have the company funneling this perk through his personal bank account; the shareholders, who would get no deduction for that $4 million expense, would be out well over a million bucks on this deal.*
CEOs get paid to renegotiate their agreements all the time, but the quid pro quo for that cash payment is rarely this obvious because they are normally renegotiating several terms at once. In this case, the CEO was paid to renegotiate one term, i.e., less jet usage.
Alas, this has nothing to do with the shareholders. It has to do with the “public backlash as corporate jets became a symbol of Wall Street greed,” notwithstanding the fact that A&F is not on Wall Street.
* The difference between $850K per year average use versus the $200K worth of jet use he still gets as part of his package, plus the $1MM per year average extra compensation over the next four years.
Posted by Marc Hodak on March 27, 2010 under Invisible trade-offs |
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.
Read more of this article »
Posted by Marc Hodak on March 26, 2010 under Government service |
Boston Scientific, maker of those ultra-cool, implantable defibrillators, made some minor changes to the way they manufactured them. There was nothing wrong with the devices under the old manufacturing method–they just felt that they could do better. Unfortunately, the company ran afoul of the bewilderingly complex FDA documentation rules that require any manufacturing changes to be reported to them. As a result, Boston Scientific has been forced to recall a bunch of perfectly good, life-saving devices, and submit their manufacturing changes for FDA review before being allowed to resume manufacturing. FDA review times run from 8 to 30 days.
Boston-Scientific tried to calm their medical customers (and investors) by hinting that the urgency of this matter should warrant a shorter review period. During this period, doctors are doing without the device (“Hang in there Charlie! We’ll get that thing implanted in the next few weeks.”), and Boston-Scientific is losing $5 million a day. If ever we needed those high-priced government services, this would be it, right?
FDA officials said in an interview that they have given Boston Scientific’s applications a preliminary look and the submissions appear to be in order. But the officials said the agency hasn’t begun an in-depth review of the material and the company will have to wait its turn.
Boston Scientific’s filings are “in the queue, and we’re going to take it when it comes up,” said Gladys Rodriguez, an enforcement director at the FDA’s Center for Devices and Radiological Health who is involved in the review. “At this point, we’re not expediting.” The FDA has 30 days to do a review, Ms. Rodriguez said.
Translation from bureaucrat lingo: “We can’t be bothered.” I mean, c’mon, it’s not like its their lives or money on the line.
Posted by Marc Hodak on March 25, 2010 under Collectivist instinct |
Congressmen are reacting to vandalism and threats following passage of the landmark health care bill:
“I don’t want this to be a distraction” to the work of Congress, Ms. Pelosi said. But she also asserted that such violence and threats of reprisal have “no place in a civil debate in our country” and must be rejected.
She is certainly correct that civil debate cannot co-exist with threats of violence. But one can’t help but see the irony of Ms. Pelosi and many other Democrats (and a few Republicans, I might add) not equating the imposition of laws as a threat of violence. Harry Reid, for instance, is totally clueless on that distinction.
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Posted by Marc Hodak on under Reporting on pay |
You should have guessed there’d be a “however”:
…However, that type of cascading salary payout, which is generally welcomed by shareholder activists such as (“socially responsible”) Ethos Foundation, is likely to draw more attention in coming days.
Gee, what would be the reason for that attention?
Posted by Marc Hodak on March 24, 2010 under Collectivist instinct, Invisible trade-offs, Politics, Stupid laws |
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
Posted by Marc Hodak on March 23, 2010 under Reporting on pay |
The Gray Lady reports:
Of the 104 senior executives whose pay was set by the federal pay regulator in the last two years, 88 executives, or nearly 85 percent, are still with the companies even though their pay was drastically cut back, according to people briefed on the government data.
The relative stability, at least within the executive suite, suggests that a soft job market, corporate loyalty and personal pride helped deter the feared management exodus at the companies hardest hit by the pay rules.
I’m sure every board is ready to apply that magic to their own companies.
Oh, some questions left out in this analysis:
– What was the senior executive turnover of peer companies not subject to these restrictions in 2009? Is it close enough to 15% to render “relative stability” as the appropriate verdict? (Best guess: peer turnover would be in the 9 to 12 percent range last year.)
– What was the composition of that turnover? Did they lose their best people (as is usual in a cash crunch) or their average people (who tend to hunker down in bad times)?
– What about the effect of promised future compensation? Lloyd Blankfein and Jamie Dimon had a sense that whatever they gave up in 2009 they could kind of make up in 2010 to 20??. What would these restrictions do if the Pay Czar threatened to hover around for several more years? (Hint: We got a clear sense of that at AIG, what could only be called an exodus of their top people. We’ll see how it works at Government Motors.)
Posted by Marc Hodak on under Executive compensation, Reporting on pay |
Ford CEO Alan Mulally made the news today with a $17.9 million payday for 2009. This included a $1.4 million salary and $16.5 million in stock and options–a total of about $1 million more than Mr. Mulally made last year. The article noted, as journalists always will, that the CEO got his increase in a year when he secured significant union concessions. This brings us to the first view of his pay:
“It’s an outrage after all the sacrifices we have taken and the pay he gets,” said Gary Walkowicz, a bargaining-committee member for UAW Local 600, representing workers at Ford’s Dearborn truck plant. “His pay is coming out of our concessions.”
So, the CEO got the union to reduce their pay, and he got more pay. Ergo, his pay was coming out of their concessions.
According to this view, Ford Motors is kind of a zero-sum game; the pie is fixed, and the shareholders or the CEO get more if labor gets less, or vice versa. In this view, it’s not fair if the CEO drives down compensation to improve the profitability of the company, only to suck some of that profitability back for himself in the form of higher pay. That is the view implied by this article. It’s the view assumed by most of the readership.
Another view is that Ford is part of a market. Several markets, actually:
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