Posted by Marc Hodak on April 9, 2007 under Executive compensation | 
Boy, the WSJ went to town on CEO pay today. Like most news stories, the writing suffers from a disturbing conflation of description and prescription. Descriptively, the rules on disclosure have changed and many companies are reacting to those changes in various ways. That’s interesting stuff for someone like me into executive compensation for professional reasons.
The prescriptive part was what you’d expect of journalists trying to rope in the non-professionals with a sensational story while pretending to offer simple answers to complex issues: a list of “Ten Things,” compiled from suggestions of various activists, experts and “daring” directors. Drum roll, please:
1. Don’t allow the board’s pay consultants to do other work for management
2. Don’t let outside CEO recruits monopolize the pay setting process
3. Don’t offer severance for anyone with a lot of equity or deferred pay
4. Make it easier to fire for cause
5. Be skeptical of “peer group” comparisons
6. Kill unjustifiable perquisites
7. Link long-term incentives with performance goals
8. Divulge precise measures for performance-based payouts
9. Conduct regular check-ups about pay practices
10. Give investors a voice in executive pay
Now, how hard could that be?
Read more of this article »
Posted by Marc Hodak on April 8, 2007 under Invisible trade-offs |
I always thought it interesting that kids derive a lot of fun from biting off pieces of a chocolate bunny. I wondered what vegetarians thought about that.
Many people get squeamish about the death of animals, especially baby animals. All babies are cute in a way that’s somehow recognized across species. So, when the Discovery Channel showed a gaggle of furry goslings being gathered up by a hungry arctic fox, one felt a sense of relief when the geese parents came back to chase the predator away, making it drop everything. But when the fox sneaked around and grabbed a helpless gosling, and the geese parents looked distraught, one shared their distress. One felt their pain, until the fox reached its little kits with the bird. After the furry little kits shared their meal and were rolling and playing, one was grateful that their mom was able to provide for them.
That’s the way it is. We root for the subject animal. We boo the seals ominously swimming around the icy shores waiting for penguins to jump in. We’re told that the death of a penguin seeking food in the sea also means death to her baby penguin waiting for that food on shore. So, seals are vicious, blood-thirsty ocean creatures. That is, until the show is about seals. Then they’re cute, playful creatures trying not to be eaten by those vicious sharks. And when a polar bear attacks a walrus colony, one’s heart immediately goes out to the pudgy, old walruses. And when the walruses successfully evade predation and the polar bear eventually collapses from hunger, we see that the cost of avoided bloodshed was the death of a noble creature.
Fact is, nature is a bloody, violent place with every creature’s life hanging in the balance, in mortal competition with both their rivals and their prey. “Nature, red in tooth and claw,” as Tennyson put it, has always been difficult for ‘nature lovers’ to accept. But it demonstrates the inevitability of trade-offs in every part of the world. It means that when we see a cute little tiger cub waiting for it’s mom and think, “I hope Simba gets what his little tummy needs!” one has to accept the criticism of being against antelopes and gazelles. Predation is an unhappy fact of life for many. But what would the world look like without it?
Posted by Marc Hodak on April 5, 2007 under Unintended consequences |
The “war on drugs” is a fount of unintended consequences, on steroids. One example of the pain this war is causing us all is the literal pain it is causing millions of Americans who are having trouble getting proper treatment. Drug laws penalize doctors for prescribing high doses of medication to certain patients. The theory is that some patients are really addicts (making it illegal to treat addicts who happen to be in pain) or dealers who are just taking advantage of the medical system to make a buck. The problem is, doctors have a notoriously difficult time telling real patients from fake ones. That wasn’t a big section on the board exam. Listening to patients and caring for them was. Do such laws really chill the treatment of pain? Ask Dr. Hurwitz. As reported in the New York Times:
Dr. Hurwitz, depending on which side you listen to, is either the most infamous doctor-turned-drug-trafficker in America or a compassionate physician being persecuted because a few patients duped him.
When Dr. Hurwitz, who is now 62, was sent to prison in 2004 for 25 years on drug trafficking and other charges, the United States attorney for Eastern Virginia, Paul J. McNulty, called the conviction ���a major achievement in the government���s efforts to rid the pain management community of the tiny percentage of doctors who fail to follow the law and prescribe to known drug dealers and abusers.���
Yes, that was 25 years. For a doctor who didn’t directly profit from the sale of the drugs.
Dr. James N. Campbell, a Johns Hopkins University neurosurgeon specializing in pain, has this to say about this prosecution:
���Opioids were a revolution in pain treatment during the 1990s, but doctors are now more reluctant to use them,��� Dr. Campbell says. ���If a doctor perceives there���s a 1 in 5,000 chance that a prescription will lead to a D.E.A. inquiry ��� just an inquiry, not even an arrest ��� he���s not going to take the chance. So the victims are the patients.���
OK, let’s say that the actual deterrence threshold was a one-in-50 chance; this is still far from theoretical problem…
Read more of this article »
Posted by Marc Hodak on April 3, 2007 under Collectivist instinct |
I’ve driven down to Maryland many, many times over the years. It’s where I’m from, and most of my family still lives there. At the Delaware border, there was a quaint sign saying “Welcome to Maryland – The Free State.”
Now, Maryland has a lot to recommend for it–lovely rivers, Chesapeake crabs, green hills as far as the eye can see. Freedom, not so much. Few states are bluer than Maryland. Marylanders love government, and not just because so many of them are federal workers. Their liberalism runs much deeper than that. For me,the only way to view the “Free State” motto on the welcome sign was with a sense of humor.
Well, the old motto is gone. Now the sign just says, “Maryland Welcomes You.” No pretense about freedom. In a way, the change represents a kind of truth in advertising. I just wonder if the bureaucrats who made the change were conscious of this truth?
Posted by Marc Hodak on March 31, 2007 under Collectivist instinct |
If you didn’t think that anything could enhance one’s experience at the Grand Canyon, think again. The Hualapai Indians have created a stunning new attraction there–The Skywalk. This bridge 4000 feet above the canyon floor looks like an experience that would leave one breathless. However, this journalist’s description of his first steps out over the abyss revealed less about his spiritual awakening or engineering prowess than of his collectivist instincts:
The Skywalk’s builders have said repeatedly that the deck is extremely durable. It’s essentially a huge steel horseshoe, capable of withstanding 100 mph (160 kph) winds and holding several hundred 200-pound (90-kilogram) people at a time.
I had no reason to doubt them. But out on the edge, my mind was racing: I tried to remember if any government regulatory agency had checked how well this thing was anchored to the cliff.
This is plainly an emotional reaction to a scary situation. But I think this comment is scary, and I have an emotional reaction to it: Why the f*@k would anyone trust that a government regulatory agency has a greater interest in or expertise about the soundness of this structure than would the tribe that financed it, the engineers that built it, or the insurer bearing its risk?
And yet, I can’t say I’m surprised. News writers are notoriously wary of private agents and their self-interests versus “the government,” as if its agents were somehow endowed with a greater degree of expertise or caring for their fellow man. They often can’t fathom that, even regardless of their economic interests, the owners and operators would be any less concerned about their guests tumbling down the side of the Grand Canyon than some bureaucrat with a tape measure and some forms to fill out. It kind of leaves me breathless.
Posted by Marc Hodak on March 29, 2007 under Unintended consequences |
Given the ongoing insurance issues related to Katrina, Mississippi seems like a good place to visit in search of that twilight zone we like to call “the land of unintended consequences.”
After Hurricane Katrina devastated the Gulf coast in 2005, another storm engulfed the insurers. Apparently, they were refusing to pay hurricane victims for flood damage. Why would they do such a callous thing? Because flood damage is excluded from coverage by property and casualty insurers. In other words, insurers never promised to pay for flooding, and never collected premiums to compensate them for such coverage.
Nevertheless, politicians and lawyers in Mississippi, acting as “defenders of the people,” pressured the insurance companies into paying more than they contractually owed. These defenders said they were watching out for the welfare of their constituents. Yet, the main effect of going the extra mile to squeeze out the extra payments was to substantially reduce their constituents’ welfare by chasing away some of the biggest insurers in the state, and leaving their people with fewer insurers charging higher rates.
Read more of this article »
Posted by Marc Hodak on March 28, 2007 under Unintended consequences |
In this day, even cigarette companies wouldn’t actually provide financial incentives to get people to start smoking. No, only people bent on helping smokers quit could come up with incentives like that. From today’s WSJ, we have the example of Rockford Acromatic Products:
The Illinois auto-parts maker used to offer $250 to employees who would stay smoke-free for several months. But some workers took up smoking just so they could quit and qualify for the reward. The company stopped offering the incentive.
“It was not our intention to encourage people to start smoking. It was aimed at people who already had a bad habit.”
That’s the way it is with incentives. People getting into the incentives game tend to have bad aim, like beginners in any sport. Even experienced incentive experts can’t always account for all of the secondary effects of their schemes.
For me, a key element in this note was that the company “stopped offering the incentive.” It’s not surprising that they stopped, of course, once they saw the perverse effect it was having. It was the speed with which they recognized this effect, and how quickly and completely they were able to change course. A more bureaucratic environment may have taken much longer to recognize the problem or deal with it. A more politicized environment, where the program was the pet project of a powerful manager, may have attempted to bury the potentially embarrassing glitch in the program, or even taken the higher numbers of people accepting the reward as proof of their program’s efficacy. I’ll leave it to the imagination of the reader to figure what a politicized bureaucracy would have done with such a program.
Posted by Marc Hodak on March 26, 2007 under Economics |
Am I the only person in the market who is baffled by the fact that investors seem to react well to falling prices of oil, metals, foodstuffs, or other commodities, but seem to panic at falling housing prices? Isn’t property value an input into business processes and the overall cost of living? If the answer to these questions is affirmative, then why should we care about falling property values?
Personally, I don’t care. In fact, I like falling property values, and not just because it rewards my view of the market when I sold my home a couple years ago and became a renter. I celebrate the decline in property value because it means that property will be cheaper for everyone, and cheaper stuff is a good thing.
But won’t all those owners in our ownership society be worse off? Only if they’ve speculated in multiple properties. Speculators are supposed to bear risk, and those who can’t are flushed out in a downturn, and that’s not all bad. People who live in their dwellings, however, shouldn’t care because they have to live somewhere, and if they decide to change where they live, they will be able to get a new place cheaper.
What about homebuilders and real estate agents? Aren’t they hurt by the drop in prices, and aren’t they an important sector? Sure, but no more so than oil companies hurt by falling oil prices, or gold mining firms hurt by falling gold prices. However, the pain of one sector is generally more than offset by the lower prices enjoyed by the rest of the market. Our overall economy would be much better off if steel cost a penny per ton, as long as the producers grumbling about it could stay in business at that price. And unlike mining firms, homebuilders can always build more homes to meet the higher demand associated with lower costs.
Read more of this article »
Posted by Marc Hodak on March 22, 2007 under Unintended consequences |
Teach for America is a group that takes kids just out of college and gives them the opportunity, if you could call it that, to teach in inner city schools for a couple of years. I came across two articles on this venture. One is the harrowing story of a real person’s experience trying to serve his “strong sense of social justice.” The other article is from the Onion. Normally, the Onion presents the more absurd version of reality. I think this is an excellent example of how reality ultimately trumps idealism…or of life imitating art.
Posted by Marc Hodak on March 18, 2007 under Collectivist instinct |
Tyler Cowen has created a kerfuffle among libertarians by suggesting that they should stop worrying and learn to love big government. He says:
The more wealth we have, the more government we can afford. Furthermore, the better government operates, the more government people will demand. That is the fundamental paradox of libertarianism. Many initial victories bring later defeats.
I am not so worried about this paradox of libertarianism. Overall libertarians should embrace these developments. We should embrace a world with growing wealth, growing positive liberty, and yes, growing government. We don���t have to favor the growth in government per se, but we do need to recognize that sometimes it is a package deal.
Cowen is a thoughtful commentator on politics and economics, but I think that he suffers here from a version of Stockholm Syndrome. He accepts the growth of government as an inevitable complement to growth of wealth. He refers to government as a kind of discretionary product upon which ���people��� can choose to spend that wealth. Aside from the questionable conflation of which people are making which choices, I believe that his conclusion fundamentally misreads history.
The global trend is clearly toward greater wealth and greater freedom. The trend in America, however, appears to re-inforce the notion of a “package deal” that Cowen is espousing. But the U.S. is not evidence of a counter-trend so much as an example of a fortuitous starting point as a libertarian’s wet dream that could not last.
Read more of this article »
