Posted by Marc Hodak on June 15, 2009 under Executive compensation, Invisible trade-offs, Politics, Unintended consequences | 
The government, purveyor and practitioner of the most perverse incentives on the planet, is coming down the road with a cart of new remedies for incentive compensation:
“This financial crisis had many significant causes, but executive compensation practices were a contributing factor,” Geithner said in his statement on Wednesday. “Incentives for short-term gains overwhelmed the checks and balances meant to mitigate against the risk of excess leverage.”
It is, indeed difficult to pinpoint all the potential causes of the financial crisis, and it’s certainly plausible to point the finger at bank compensation. The politicians and media would have us believe that:
A consensus has grown in Washington that compensation incentives based on short-term profit encouraged excessive risk taking at banks and played a major role in creating the financial crisis.
But the manner and degree to which bank compensation is at fault is, in fact, quite speculative. Read more of this article »
Posted by Marc Hodak on June 14, 2009 under Practical definitions |
The WSJ headline is: “Southern States Poach Business Amid Downturn”
Kind of conjures up some southern hick with a shotgun sneaking up on someone’s farm, and leading away some cattle in the dead of night.
It doesn’t seem to conjure up decades of rustbelt politicians sucking the life out of their businesses with ever-increasing taxes, and workplace regulations flowing from their capitals like topsy. It doesn’t evoke geographic and jurisdictional competition, with entrepreneurs and corporate managers coolly poring over spreadsheets deciding where to invest their scarce capital.
Would a southern newspaper use the word “poach” to describe competition for capital in this context? I don’t think so. It used to be that you could expect such anti-business wordsmithing from the New York Times. But we see just as well on the front page of the Wall Street Journal.
Posted by Marc Hodak on under Executive compensation, Reporting on pay |
Apparently, the answer is: just because the Corporate Library said so.
In a recent report called “What is the Impact of PE on Corporate Governance,” the corporate library concluded that their analysis:
…does not support the private equity claim to superior corporate governance as the companies enter the public markets. On the contrary, it indicates that buyout-fund-backed companies exhibit, in higher proportion than average, a number of features that have the potential to benefit executives at the expense of shareholders, including takeover defenses and boards whose independence may be compromised. In addition, the often-made assertion that private equity firms design compensation packages well suited to link pay to performance is not supported by this study. The companies lacked the key compensation structures that are widely believed to link pay to performance.
As someone who designs compensation packages for PE firms, and has often asserted that the designs were especially well suited to link pay for performance, I was interested in the basis for their conclusions. What key compensation structures were PE-backed firms lacking? Who are all those people who believed in them?
The report ended up offering a hopelessly muddled approach to compensation unsupported by any empirical analysis.
Read more of this article »
Posted by Marc Hodak on under Economics, Politics |
Compare this item of health care reform being proposed by the Administration:
“The president does not want to dismantle privately owned plans. He doesn’t want the 180 million people who have employer coverage to lose that coverage. He wants to strengthen the marketplace,” Sebelius added.
with this:
President Obama, in a pivot from some of his harshest campaign rhetoric, told Democratic senators yesterday that he is willing to consider taxing employer-sponsored health benefits to help pay for a broad expansion of coverage.
Versus this more recent pronouncement of Obama’s second:
Vice President Joe Biden opposed proposals being discussed by some lawmakers to tax health insurance benefits provided to people by employers as a way to pay for an overhaul of the $2.5 trillion U.S. healthcare industry.
Which indicates that Obama is waffling either on his committment to not tax these benefits, or to consider taxing them, or that Biden hasn’t gotten the most recent memo. History shows that all three are possible, even at once, in terms of political positions. As economic propositions, though, the government will have to make a trade-off: reduce private health care by taxing it, or paying for public health care by raising the money elsewhere. Reality, unlike politics, won’t allow you to have it both ways, let alone all three.
Posted by Marc Hodak on June 9, 2009 under Executive compensation, Invisible trade-offs, Reporting on pay |
So, you’ve played the populist card on executive compensation, Mr. President. You used it to provide cover for the mammoth, Democratic-payback-mondo-porkfest called the “Stimulus Package.” You used $500K to buy $787B. Well played, sir. But now that card is on the table. You can’t just pick it up again.
So, now we all have a bunch of silly-assed compensation rules that anyone could have predicted would create retention risk at American public banks. Sure, most people were saying, “Screw ’em. Where else could they go?” but we knew otherwise, didn’t we BO? We knew that any bank under TARP would chafe at the pay restrictions, in part because it put them at a competitive disadvantage. We knew that once you set some of the banks free, they would poach the others into submission, those big wounded banks still trapped under TARP, with all that taxpayer investment. Poof.
So here we are, on the eve of a TARP repayment by some banks that you have done everything to slow. But that part of the game is finally up. Now, what do you do?
Of course. You try to maintain some uniformity on the pay restrictions across all the banks, in and out of TARP. So, you’re forced to loosen up some of the restrictions on the remaining TARP banks while imposing new ones on the soon-to-be non-TARP banks. I know where you’re coming from, Mr. President.
Don’t worry, your secret appears safe, for now. The media has not a clue about your strategy or its motivation. Most of them are still at the “where else can they go?” stage. And the regular readers of this blog are plenty smart enough, but there’s only a few dozen of them–not enough to really alert the media. So, don’t worry. Do what you have to do. It’s all you can do, isn’t it Mr. President, as political choices lead to economic consequences that prompt more political choices…
Posted by Marc Hodak on under Collectivist instinct, Politics |
The formula accepted by every political leader: Max(societal good) = MM+MP. Here are the terms:
MM = More money
MP = More power
Every government official will tell you, there is no problem they can’t solve if only you grant them MM+MP. As long-time readers know, I have come to facetiously label this formula Hodak’s Law, since it is so commonly, universally invoked by politicians, and credulously reported by the press. Tim Geither is clearly no exception.
Posted by Marc Hodak on June 8, 2009 under Politics |
Or that’s what I thought. Here is a description of a recent celebration for every banker’s favorite guy:
Last week, 600 people, including executives from Goldman Sachs and J.P. Morgan Chase, filled the cavernous National Building Museum in Washington, D.C., for a $5,000-per-table tribute to the chairman of the House Financial Services Committee. He is marshaling legislation that promises to make Wall Street a more regulated and less prosperous place for years to come, and to hear it from some of the bankers at the event, they couldn’t be happier that a tough-talking, capital-L Liberal Democrat from Massachusetts is leading the charge to rewrite their futures.
Yes. Couldn’t be happier.
Posted by Marc Hodak on June 7, 2009 under Patterns without intention |
This time...
...it is based entirely...
...on science!
When it comes to “global warming scientists” Freeman Dyson puts lays it out so beautifully:
The whole livelihood of all these people depends on people being scared.
Really, just psychologically, it would be very difficult for them to come out and say, “Don’t worry, there isn’t a problem.” It’s sort of natural, since their whole life depends on it being a problem. I don’t say that they’re dishonest. But I think it’s just a normal human reaction. It’s true of the military also. They always magnify the threat. Not because they are dishonest; they really believe that there is a threat and it is their job to take care of it. I think it’s the same as the climate community, that they do in a way have a tremendous vested interest in the problem being taken more seriously than it is.
If someone is paid to say something, that doesn’t necessarily mean they’re lying–not by a long shot. But it does color what they say, because you know they couldn’t possibly say otherwise, even if that were the truth. I don’t expect an advocate to be balanced. But I never confuse an advocate for a scientist, even if one could be both.
Posted by Marc Hodak on under Executive compensation, Stupid laws |
Model of current TARP compensation rules
According to our private sources:
The Obama administration plans to appoint a “Special Master for Compensation” to ensure that companies receiving federal bailout funds are abiding by executive-pay guidelines, according to people familiar with the matter.
They appear to be set to name Kenneth Feinberg, a lawyer, whose main qualification appears to be that he had the word “compensation” in his previous title. His job will be to sort out the contradictory, illogical morass that Congress has created for TARP recipients. Good luck Ken.
Posted by Marc Hodak on June 4, 2009 under Executive compensation, Politics |
There has been a lot of talk about Say on Pay, i.e., putting executive compensation packages up for shareholder vote. The U.S. government about to force every public company to submit to this policy. This is considered a corporate governance matter, i.e., something for the putative benefit of the shareholders. Unfortunately, debates over corporate governance policies rarely offer analysis of how the shareholders are actually likely to fare under a given policy.
Jie Cai and Ralph Walking of Drexel University recently published such an analysis for Say on Pay. The results will startle, well, no one.
Basically, they found that firms “with high abnormal CEO compensation and low pay for performance” benefit under a Say on Pay regime. If the CEO does not fall into the overpaid camp, Imposing Say on Pay will destroy value for the firm.
So, what is the net effect on shareholders if we impose Say on Pay on every public company, where the vast majority of them do not have overpaid CEOs? That’s right–shareholders as a class will suffer. But, hey, it’s a small price for the shareholders to pay so that our politicians can demogogue the issue for a few extra votes. And in the new definition that whatever is good for our politicians is “patriotic,” shareholders of well-governed firms should feel pretty darn proud.
