Friday, January 30, 2009

Recession? What recession? And where's my bonus?

"I know you're out there. I can hear you reloading."
Billy Crystal's character, insult-comic Buddy Young Jr., in the mah-velous (and often overlooked) 1992 comedy-with-a-point, Mr. Saturday Night.

It seemed appropriate for the tenor of some of the recent comments on SHAMblog. But as I've always said
, I'm just glad people keep coming back.

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This whole controversy over the lavish bonuses with which Wall Street bigw
igs (and other top executives) commonly reward themselves leaves me with mixed emotions. On the one hand, I would agree that given the condition of the U.S. economy, with layoffs and plant closings left and right, and almost 4.8 million of us now collecting unemployment benefitsthe highest number since the U.S. Dept. of Labor began formally tracking the figure in 1967it seems in poor taste indeed, if not "shameful" (to use Obama's word), for CEOs to be voting themselves seven-figure bonuses. The aggregate number for Wall Street as a whole in 2008 has been quoted as $18 billion. If you're going to come to Washington pleading for a bailout, claiming TBTF* status, you probably shouldn't take the proceeds and use them to buy yourself a brand-new Brooklands (shown) for the drive home.

The sticking point for me is that the question of executive bonuses has been melded into that whole discussion of the American caste system, and how there's simply
too much of a skew between the folks at the top and the folks at the bottom. It's one thing to argue that it's unconscionable for already highly paid executives to convert public moniesi.e. bailout funds—into their private Christmas bonuses, especially when those companies had lousy years. I think very few of us would disagree with that. But if we're broadening the argument—if we're saying as general doctrine that no one should be allowed to make that much more than almost everyone else... Well, that strikes me as a dangerous sea in which to wade. All the more so if such edicts are going to be handed down from Washington.

I see this as being distinct from discussions of taxation (t
hough I can understand where staunch free-market types might beg to differ). To me, it's one thing to say that seven- and eight-figure earners should pay taxes at the highest established rate. Even if the tax rate on ordinary income over $1 million rises to, say, 60 percent, that still leaves the $10 million earner with $4 mill for his trouble. That is a very different matter from saying that no one should be permitted to make the $10 million in the first place, that there should be some kind of cap on earnings. And yet I wonder if we're edging close to that mentality. I even wonder (based on some of the man-in-the-street comments I heard around the time of the inauguration) if people actually feel that they've given their new president a mandate to put such a policy into effect.

I do think we have to figure out ways to encourage a more voluntary "redistribution of wealth," to invoke the phrase that was used as a political jackhammer towards the end of the last election cycle. The key word being voluntary. No?

* "Too big to fail." The theory here is that certain industries or even major companies are simply too integral to the economy to be allowed to go under; the ripple effect would be disastrous. This, of course, was the logic used in bailing out GM and Chrysler, as well as AIG.

14 comments:

Stever Robbins said...

What little I know of the relationship between income distribution and economics is that past a certain point, income disparity starts having negative effects. (An economics friend told me a couple of years ago that we're approaching income skews typical of third-world nations, which is apparently a bad thing.)

While people often cry that folks need to make $100,000,000 to be motivated to do what they do, that's really not my experience.

I've spent my entire life in the world of entrepreneurship and know several very, very, VERY successful entrepreneurs (nine-to-ten figure paydays). In nearly every case, making money is not their motivation. They would have been just as happy to have a much smaller payout. They were just thrilled to be able to do the thing they were passionate about. A couple even said the money was entirely irrelevant beyond covering their living expenses.

(My sample includes two Fortune 500 CEOs, by the way.)

The big exception to this is the people I know who made their money through some form of finance. Many of them were/are strongly motivated simply by big numbers with lots of zeros.

Interestingly, startups typically choose their executives for passion and commitment and intrinsic motivation, while many Fortune 500 type companies explicitly choose people who demand nine figures of bonus pay just to show up and do the job they're hired for. It's very strange. The startup way seems more sensible to me.

I have absolutely no desire to cap incomes. But I do believe in a regressive income tax.

For financial professionals, however, I believe all fees should be fixed at fee-for-service. No more getting paid as a percentage of the size of someone else's transaction. I'm happy to pay a trader for their time and skill, but I'm not happy to pay them to take a percentage chunk of the value that was created over years by someone else.

Elizabeth said...

ways to encourage a more voluntary "redistribution of wealth,"

LOL! If I didn't know any better, I would have thought I stumbled upon Comedy Central. Very funny, Steve. ;)

Cal said...

Here are some quick thoughts:

1) I don't want a cap on income either. But when some of those at the top help to cause this catastrophe, they should have to pay in some way. Why aren't these bank, financial services, and mortgage CEOs not offering to work for $1 this year? It's not like many of them would have any serious personal economic problems, as they have gotten their money out.

2) Maybe this "clawback" provision being implemented at some of these financial firms will be a deterrent for excessive risk-taking. We will see.

3) I worry that in this environment where the legacy media (newspapers, magazines, etc.) are being massively shrunk, there will an even greater lack of accountability. Why aren't the board members of some of these companies taking hits in the media? It seems all these people do are to get paid a lot of money to back-scratch CEOs. And we will have less real investigative reporting to catch frauds and shenanigans.

I know I probably didn't directly address the topic in some of my points, but some of this stuff makes me so angry I would just be rambling on. I just know that the Great Depression started when you had a similar disparity and skewering of wealth. Because it's the old Reaganomics trickle-down theory in reverse. When the rich the catch a cold, the poor (and many middle-class) catch pneumonia.
And it shouldn't be like that. I don't think it's socialism necessarily to not have a Bell Curve income distribution that we have now.

renee said...

Questions, for no one in particular: who decides how much is "too much" money? And what industries or professions are "worth more?" Do we pay educated, brilliant, dedicated scientists who research global warming the same as their scientific counterparts who research childhood leukemia? Does either scientist earn as much as Bono? Who gets to weigh in on that answer?

Or let’s take a finance example. A money market manager creates a set of funds, watches them, analyzes them, switches some out, investigates others, and cares for this family of funds with every bit of his or her financial soul for a number of years. As a result, the customers buying that money market fund and benefiting from those management skills make a nice return on their investments. In addition to salary, shouldn’t that manager earn a financial extra reward for those astute decisions that helped perhaps many thousands of people invest wisely and gain income as a result of his / her shared knowledge and expertise? Sure, you earn a salary in your job and do the work required, but as added incentive, the better the fund does, the more you earn? (The inverse would need to apply as well, of course. Salary, yes, but no bonus if your fund under performs.)

In terms of business and “doing the ‘right’ thing” regarding compensation: I can't help but think about the Ben & Jerry's model. Before 1990, they had a well known '5 to 1' pay ratio - the highest paid employees made no more than 5x the lowest paid employees. It was all very friendly and "we're all in this together" up there in Burlington. The culture of the company was such that it wasn't about execs in an ivory tower raking in millions - it was about making a great product, building the company and treating employees with respect.

That ratio eventually changed, to 7 to 1 around '95, when they realized they couldn’t attract the marketing and business talent they needed to grow the business if they remained at the previous ratios.

Then they threw that concept out altogether once Unilever purchased them in 2000.

For $326 million.

I don't know exactly who pocketed that $326 million, but I would have no quarrel with the bulk of that selling price going to Ben and Jerry. They started the company, built a brand that holds a unique place in the market and they should be rewarded once they sold the company.

But jeez – isn’t that a lot of money for ice cream? Isn’t it too much? Does anyone “deserve” $326 million for ice cream? Why not cap those earnings? Who gets to decide what something is worth? Ice cream is not an industry TBTF. Although the dairy farmers, paper companies, carton manufacturers, delivery fleets and supermarkets might dispute that.

Anonymous said...

Steve;

America already has the greatest voluntary wealth redistribution system in the free world: charities and not-for-profit organizations. The IRS recognizes over one million of them (that's a lot of paperwork). There are charities for every issue and half-the objects you can name - from stray cat adoption to buying up old growth timber land in the Cascades to preserving old buildings, charities and non-profits support this stuff.

And the dollar amounts are huge, and they come from the wealthy. Harvard's $30 billion endowment didn't come from car washes and bake sales, it came from rich people with big egos and a desire to have a building named after themselves.

How come Bill gates and Warren Buffett have given away over $100 billion (combined) to charities? Why didn't they give it to the government or just let the estate tax claim it when they die?

President Obama claims to be outraged by Wall St. Bonuses, but isn't it just more "stimulus" - cash in the hands of wealthy people who will have to fork over 40% of it in taxes anyway?

personally, I'm "outraged" that Obama's stimulus package is 12% stimulus (roads, bridges, broadband, electric grid projects) and 88% social programs for Medicaid, Department of Education; Community Organizers; Unemployment payments and the like.

How can paying people for not working help stimulate the economy?

But I digress.

My point is still valid: charities and non-profit entities redistribute wealth. If you don't think so, name any political issue or even 10 objects which do not have a charity funding the knowledge, awareness or study of them. As an example, there are tax-exempt organizations studying kites, their designs and applications.

Jen said...

Renee asks what I think is a really good and important question:

"Who gets to decide what something is worth?"

Now my question is: Who else think it's one of the best questions to ask about our economy and way of life here in the good old U.S. of A.?

I'm at a point in life where I can look back at a time, more than 10 years ago, when I was making more money than I'll perhaps ever make again. "Dropping out" of the paying job market hurt me financially but helped me personally. Now I am looking at going back to work again at 50 years old and feel sort of sad knowing that what I made at age 40 is probably more than what I'll make at 50, even though the work I'll be doing now is perhaps more valuable than what I did then. Again, who decides? Who assigns value, and to what?

My husband is fortunate to have a good paying job, for now, but almsot everyone (it seems) is expendable in this economy. Lots of good people are out of work.

Something's gotta give ...

Chad Hogg said...

I am with Obama that to request emergency funding from the government and then pay bonuses to your executives is unconscionable. Regardless of what you might think about income distribution, it is an indicator that the corporations in question are not in an emergency after all, or at least that they did not need as much as they asked for. No responsible company in danger of failing would "spend" money on bonuses that do not directly help them to generate income. I blame Congress for not writing more restrictions into the bailout legislation, stockholders for allowing their boards to do this, and of course the executives themselves for their greed.

That said, I do not think there should be any legally mandated earnings cap. People should be paid according to what value they provide to their employers. However, I tend to be of the opinion that most corporate executives are in fact paid far in excess of their actual value. I recognize that the sorts of people making these compensation decisions know better than I and that they believe that the decisions they make are in the best interests of the company, but can someone really be that much better than the competition?

High executive compensation means that corporate boards believe that the supply of qualified executives far outstrips the demand for them. I am unconvinced, however, that a great executive will actually improve a company significantly beyond what a qualified but unexceptional one would do. In fact, sometimes I think that an average person off the street could be almost as effective.

Using the bailout companies as an example, each of them has failed miserably to prepare for the current economic reality. This is not a failure of manufacturing or service; it is a failure of strategic planning. That means that the executives failed. That their employers are paying bonuses to keep them from going to a higher-paying job even though they have performed poorly is astounding.

Elizabeth said...

From one guy in the know, a brief but highly persuasive plea for compassion on behalf of the Wall Street execs: Dear Mr. President: About Those Bonuses...

Steve Salerno said...

...to request emergency funding from the government and then pay bonuses to your executives is unconscionable... it is an indicator that the corporations in question are not in an emergency after all, or at least that they did not need as much as they asked for. No responsible company in danger of failing would "spend" money on bonuses that do not directly help them to generate income..."

Those are excellent points, and the crux of it, to me. One could argue that the free market is the free market, and under normal circumstances, in theory, if a company generates $1 billion, and elects to pay almost all of that $1 billion in lavish executive salaries while paying its workers minimum wage--and if it can get away with that behavior in the marketplace--then that's life, I guess. But when a company comes to Uncle Sam for emergency funding, and then elects to use that emergency funding (which is, after all, public money) for exec compensation, that's another matter. And I'll tell you something else: I don't understand why such behavior is merely "unethical" or "shameful." Why isn't it illegal? Wouldn't that constitute fraud? Hell, if I lie on a loan application in order to divert the money to purposes other than stated, I can get arrested. Why not them?

Kratos said...

This state of the economy interests me quite a bit as a student. The level of control the modern technocrats and aristocrats have is amazing. We've seen income disparaties like this before, in late 18th and early 19th century France. When those who were the rich were beheaded. Now, this may be a rather crude foreshadowing what can happen today, but if people are pushed hard enough, I wouldn't be surprised. Just an interesting thought. What do you think, Steve?

Steve Salerno said...

What I think is that we've lost our will to revolt, Kratos--at least in the fashion you're envisioning/alluding to. Obamaism may be as radical a step as we're prepared to take. OTOH, one could plausibly argue that American voters did indeed say "off with their heads!", symbolically, in this last election cycle.

Apropos of you remark about the "modern" aristocracy, it does bear mentioning, as a bit of historical perspective, that Ike, in his farewell speech of 1961, famously warned of the dangers of the coming "military-industrial complex." The military part doesn't quite carry the heft it once did, perhaps, but certainly the industrial part has held sway in governance at all levels for some time now.

The next four years should be interesting. We'll see how much will the American populace has for "real change."

Steve Salerno said...

Cal: re this remark--

I don't think it's socialism necessarily to not have a Bell Curve income distribution that we have now.

I agree totally. The question is, how do we get there without tinkering in a fundamental (and perhaps even counterproductive) way with the basics of free-market economic function?

Kratos said...

One thing I find quite fascinating is all of these self-appointed "captains of free enterprise" haven't even read one page of Adam Smith's "Wealth of Nations." Yet, they continue to profess that government isn't the solution to the problem but the problem itself.

Steve it truly is sad when those who enjoy the little freedoms and rights we have are not willing to fight for them. I still hold the hope that when people are pushed truly hard enough, then people like Madoff and all of these rotten CEO's will have no where to hide. Then again, it could be the grieved desperation of a naive child.

Steve Salerno said...

Kratos: Well, I'm trying to do my part, albeit on my own small stage: I think you'll find my forthcoming piece for Skeptic interesting, as I plan to make a compelling argument for why white-collar crime should be treated in a much more serious fashion--drawing punishment equal to, if not more severe than, homicide and other violent crimes.