Justifying a 50% pay cut, poorly

Posted by Marc Hodak on October 21, 2009 under Executive compensation, Invisible trade-offs, Politics | 5 Comments to Read

Obama’s pay czar has just dropped more shoes, this time on 175 pairs of feet:

Kenneth Feinberg, the Treasury Department’s special master for compensation, will lower total compensation for 175 employees by an average of 50%, these people said. As expected, the biggest cut will be to salaries, which will drop 90% on average.

I’m sure that Mr. Feinberg, like any good fiduciary, carefully examined the value of each of these 175 executives, individually determined their cost relative to their value, evaluated competing alternatives for their talents, including more entrepreneurial venues (e.g., hedge funds) where they can make gobs of money away from public scrutiny, then evaluated the risk associated with losing each of these people, and the cost to the shareholders of doing so.

Or, more likely, Mr. Feinberg was told by the politicians who ran a different calculation that he had to cut those executives’ pay in half, regardless of the financial consequences, and he figured out how to deliver that result.

The political calculation went something like this: “If we slash the pay of these executives enough to grab headlines, and lose 35% of them, e.g., to competitors, early retirement, etc., then taxpayers-as-shareholders may lose about 25% on their investment relative to keeping that talent. But, of course, the taxpayers-as-shareholders will never know what they’ve lost because if they thought like prudent investors we government officials could never get away with the crap we pull on them all the time. On the other hand, headlines that say we really stuck it to the bankers can get us a 4-6 percent voting edge in competitive districts where we might otherwise be vulnerable to political challengers.

In short, the politicians have figured out yet another way to buy our votes with our dollars. And our largely innumerate media pretends like these decisions are made purely based on the public good.

COACHEP » Blog Archive » Posts about Kenneth R. Feinberg Watch as of October 22, 2009 said,

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Kat said,

I’m short the United States.
Stu said,

What’s with this “talent” we keep hearing about? Hmm, exactly how talented do you have to be to make a series of decisions that destroys the country’s economy? Oh, but god forbid the pay cuts cause these “talented” execs to seek lucrative cash elsewhere… You seem to be under the illusion that Wall Street is a meritocracy, when it’s cronyism at its finest. There is no talent there. There are 3.5 million unemployed Americans, including plenty of MBAs MFAs and Series 7s, who could do the same job with even better performance than the industry’s current leadership — believe me, I’ve seen the incompetence firsthand. The dirty secret is that just about anyone can do these banking jobs, and the fact that a number of overt failures continue to hold them is proof that your entire “meritocracy” is a sham.
Jean said,

Stu: Have you taken Econ 101? If you did, you might discover that lowering pay never increases the quality of talent.
Have you taken History 101? If you did, you might discover that when governments set prices, the outcome is always market distortions that are not pretty. I actually thought that was known as Communism.
Have you taken Philosophy 101? If you did, you might discover that this hype about banker pay is more about greed and jealousy of those outside the banking industry.
If you took Business 101, you’d learn that the most effective tool is to vote with your dollars. If you don’t like banker pay, don’t patronize banks.
Kat said,

Stu,

I realize that you’re labouring under the mistaken assumption that you have learned all you need to know about Wall Street during your brief stint in the Goldman Sachs mail room, but you’re wrong. You give yourself away by mentioning series 7 in the same breath as MBAs.

Sure, I agree with you that most investment bankers add about as much value as pouring chalk into your mother’s favourite cookie recipe and the senior management of these firms sought glory by trying to be kings of the trashiest of the trashy assets, but they are not “most” of Wall Street. You need the traders to run the books – and the traders made money last year.

And think about it…if it’s all crony phony capitalism, why would you want to shake out all the cronies by underpaying them when you’re relying on those very weasels to pull in the other cronies to pay back the money the dumbocrats you helped elect forced me to lend to them (let’s get real about how much of that money is going to come from you).