Going Galt

by on October 21, 2009 at 5:35 pm in Current Affairs, Economics | Permalink

The Obama administration orders huge pay cuts:

Under the plan, which will be announced in the next few days by the Treasury Department, the seven companies that received the most assistance will have to cut the cash payouts to their 25 best-paid executives by an average of about 90 percent from last year. For many of the executives, the cash they would have received will be replaced by stock that they will be restricted from selling immediately.

And for the 25 best-paid executives, the total compensation, which includes bonuses, will drop, on average, by about 50 percent.

The companies are Citigroup, Bank of America, the American International Group, General Motors, Chrysler and the financing arms of the two automakers.

There is no way this will work as advertised.  If the administration actually follows through, most of these executives will quit and get higher paying jobs elsewhere.  Executives not directly affected by the pay cuts will also quit when they see their prospects for future salary gains have been cut.  Chaos will be created at these firms as top people leave in droves.  Will the administration then order people back to work?    

Addendum: Larry Ribstein has an excellent post on this issue and see Max Fisher for an interesting explanation of the timing and a good roundup.

fusion October 21, 2009 at 5:43 pm

>>Will the administration then order people back to work? >>

Why would you want to order back to work people who lost billions of dollars and nearly destroyed the economy?

matt wilbert October 21, 2009 at 5:47 pm

If there is a large market for incompetent executives, you could be right. Even so, I’m not sure it would hurt the companies much, as I am sure there are other incompetent executives available.

Max Kaehn October 21, 2009 at 5:55 pm

You seem to be assuming that the skill of these executives is strongly correlated with their pay. I am dubious that this is actually going to negatively impact the performance of the companies.

Bob Montgomery October 21, 2009 at 6:01 pm

I have a hard time seeing how this is going to work. If the goal is to get people to quit, then sure, seems great. But I don’t think that’s the goal. Is it?

J October 21, 2009 at 6:03 pm

“If the administration actually follows through, most of these executives will quit and get higher paying jobs elsewhere”

That’s the problem with this strategy. If they really want to do this, they should pass legislation imposing an income tax rate of 100% on all income above, say, 250K, on anyone who was an employee at a firm when it received bailout money, regardless of where they subsequently work, until that money is paid back.

kvn October 21, 2009 at 6:11 pm

On the surface, this does seem like a pretty draconian measure. But, don’t such conditions incentivize repayment? No?

Anyway, I think populist momentum for this kind of action has probably subsided, but good luck generating outrage for the executives of companies being bailed out.

Still, I’m sure this is just further evidence for those who believe Obama is, in fact, the Manchurian candidate that we are are already on the road serfdom.

Andrew Stella October 21, 2009 at 6:27 pm

Awesome! The government forcing the some of the most competent people in the world to work for peanuts! What does that say to the young children of this country? What a great message! A sure road to incentivizing growth and prosperity forever! Thanks Obama!


Robbie October 21, 2009 at 6:36 pm

This isn’t the government imposing pay limits on the private sector, why on earth should the new owners (us) continue paying high wages when the original justification that they were necessary to get people who could run the company well is so patently false. These people were massive failures, the fact they performed so poorly should be an illustration of the fact that it is very difficult to choose good executives. In light of our newly discovered lack of ability it makes no sense to pay very high wages since our choices are probably not up to the job.

Andy Stahl October 21, 2009 at 6:43 pm

Insofar as these are, in large measure, now government-owned corporations, it makes a certain sense to compensate their executives at rates comparable to those high-ranking federal employees receive. Perhaps Secretary Geithner, with a salary of $191,300, who supervises a department employing 116,000 with a budget of $11 billion, simply doesn’t think those with comparable responsibilities should be paid disproportionately.

stanfo October 21, 2009 at 6:46 pm

Isn’t this one way to solve “too big to fail”?

mulp October 21, 2009 at 6:57 pm

Still, I’m sure this is just further evidence for those who believe Obama is, in fact, the Manchurian candidate that we are are already on the road serfdom.

Aren’t about 50% of Obama voters outraged that Obama isn’t the radical leftist commie socialist that would nationalize everything from health care to energy that Sarah Palin promised he was?

razib October 21, 2009 at 7:11 pm

if the readers of *marginal revolution* are reacting this way how do you think the populace as a whole feels right now? simon johnson is right, people feel the system and crooked, and without trust, there goes the system.

David J October 21, 2009 at 7:16 pm

If we assume that these people were rewarded in the past for their mis-management then why are we going after future income instead of past income. I’m guess these people didn’t spend everything they earned and thus impounding their assets, and even going so far to as “reset” their social security, would impose an appropriate punishment for causing the bailout situation and would go to recoup that money much more quickly. Then, if they truly are talented they can use those skills to obtain gainful employment that will quickly replenish those reserves that were impounded.

Also, as far a mechanics go, we already have procedures in place to recoup money for reasons such as alimony and child support – those mechanisms should theoretically work for this as well.

And haven’t we learned that someone owning stock in a company does not lead them to make good long-term decisions but merely decisions that maximize their return over the timeframe they expect to own the stock. Also, if they leave now they own stock but have no control over how it performs (though it could be said that their leaving would cause a new increase in the stock price…)

Bill October 21, 2009 at 7:23 pm

Galt would have said “Tough luck for you.” and would have let them go belly up without a bonus or deferred comp. Get real.

econ phd October 21, 2009 at 7:29 pm


You’re an ideologue with nothing interesting to say. I desperately wish Tyler would drop you from MR. In all honesty, your posts vitiate the rest of the blog. For instance, this post could come from any Cato Institute intern. What benefit does it have to MR readers of any political persuasion?

I hate to be harsh but you really ought to realize you’re out of your depth.

Jason H.

Eric H October 21, 2009 at 7:35 pm

Why does everyone believe that these execs were/are failures? They were incredibly successful at convincing Congress and two administrations that they desperately needed $billions. Anyone else who wants to belly up to the trough is going to want this kind of well-connected talent. Crony Capitalism not only did not leave town in January, but it sent for its family.

Russell L. Carter October 21, 2009 at 7:46 pm

I also relish, in common with many other comments posted above, the prospect of testing a banal Randian’s predictions. No matter what the outcome, though, if this goes through, it’s all good.

What this post is most useful for though is as an inadvertent expose of what the devoted Randian views as the highest skill of all, and thus worth unlimited immediate compensation: screwing United States citizens, via the federal government, out of all of their money.

Finally, I actually figured this was Alex while reading the RSS feed. But it was too fun to pass up. Well worth the subscription price (Alex’s other posts scrolling past my eyeballs). Thanks so much, Alex.

jdd6y October 21, 2009 at 7:59 pm

Did taking TARP money make an entity beholden to administrative dictat in the future? If not, this isn’t even legal. Firms will just give back the TARP money.

Not that the execs have anywhere to go. They are overpaid with respect to other industries. The firms themselves are probably on board as the bondholders and shareholders, maybe, will benefit. Only non-tarp firms could hire these guys away.

Wall street has only its self to blame. There are no justifications for the BODs willingness to allow such absurd compensation systems — without payouts based on paper profits in any given year and no requirement to repay with interest when those paper profits get written down the following year. That insolvent banks are paying all sorts of comp when they could replace their people at 30% of the price, tomorrow, is amazing to me.

sam October 21, 2009 at 8:16 pm

kudos to obama!!! these douchebags were incompetent idiots.

anonymouse October 21, 2009 at 8:21 pm

oh, come on commenters. there is no way that exactly these executives were involved directly in the bad decisions that tanked their companies. Would you fire the top 25 generals in the US army for the disaster of the Iraq war, even the ones who voted for Obama, spent the war in South Korea, or who were being sidelined for complaining about Rumsfeld?

The top 25 at these companies will include some highly profitable traders in still successful businesses (like the commodities trader whose group is being spun off from Citi); top compliance and legal execs whose skills are in rapidly increasing demand across the economy; and some relationship people who can take key clients with them to new firms.

Ricardo October 21, 2009 at 8:38 pm

I just finished reading Charles Ellis’ book “The Partnership” about the history of Goldman Sachs. What is interesting is that back in the days when the firm was still legally a partnership, employees of the firm would actually experience a drop in pay once they were made partner. The idea was that the long-run growth potential of the firm was always seen to be so high that this would more than compensate for the cut in salary. I don’t have to tell anybody here that Goldman never had much of a problem in retaining its most talented partners.

The reality is that this isn’t some crazy socialist government plan. It’s what one of the most successful investment banks in history did for decades in order to build loyalty within the firm.

Suspicious October 21, 2009 at 8:57 pm

The best method of exposing a dumb regulation is to enforce it.

FE October 21, 2009 at 8:58 pm

(1) The potential for a talent exodus would be more worrisome if pay cuts had been implemented at the outset of the crisis, when these executives had more options. At this late stage, however, most of the executives who had better prospects elsewhere have already jumped ship. The survivors at these companies, like the employees of a company that has gone through several rounds of buyouts, are likely the ones holding on for dear life.

(2) The caps make more sense on a company-by-company basis than they do in the abstract. There is little reason to think that GM and Chrysler are stocked with brilliant, irreplaceable executives, or that their rivals are getting ready to poach them. At AIG, anyone from financial products who is looking to leave will have to persuade their new employer that he/she was one of the *good* employees, and not just someone who wrote swaps on the assumption that home prices could never go down. There doesn’t seem to be anything unique about GMAC that would require it to retain all of its current execs. Citi and BAC are harder cases, but they were built by making acquisitions and cutting headcount; there ought to be a reserve army of laid-off executives standing by to fill their old jobs.

(3) If CEOs like Fuld, Wagoner, Thain, Nardelli, etc. were worth every penny at the time of their downfalls, why hasn’t anyone hired them now that they are available? If, as seems indisputable, these people were overrated and overpaid, then we should suspect the same of their successors and underlings.

(4) We don’t know yet what criteria the special master used. I have a feeling he took some surveys confirming that talent can be bought at a cheaper price.

(5) Many people who are against cutting pay for GM executives seem to have been in favor of cutting pay for GM autoworkers. If you are one of those people, then the burden is on you to explain why cutting blue collar pay would not have the same adverse consequences as cutting white collar pay.

(6) If nothing else, this experiment is worthwhile to test the “I’ll go start a hedge fund” claim. This claim, which usually comes up whenever financial industry pay is discussed, is that every foot soldier on Wall Street goes to work fully expecting to quit that day to make easy money by starting his or her own hedge fund, only to be lured with bonus money to reluctantly work another day for the shareholders. We should get a pretty fair test of that claim.

chev October 21, 2009 at 9:14 pm

One poster asked where could the employees go and named Canada. Canada has #1 ranked banking system in the world with lower paid employees. USA is 40th, behind Namibia and Croatia. Maybe these Wall Street “wizards” could improve Chad’s financial system, but Canada certainly doesn’t need them.

In a just world, the salaries/bonuses from the financial employees/shareholders would be clawbacked to avoid future moral hazard problems of this type.

Derek Scruggs October 21, 2009 at 9:36 pm

This strikes me as no different than something a majority shareholder might demand. My company (of which I’m a minority owner) caps my and other executives’ pay too. Partly because our main investor demands it, but also because it just make sense that our overall compensation should be tied to profit, not whatever we vote ourselves. (We could outvote him if we wanted.)

The Truth October 21, 2009 at 10:12 pm

“Will the administration then order people back to work?”

Don’t have to. For $200K I’ll take the job. Its also a bit of a stretch to say the CEOs of Chrysler, GM, and AIG were anything remotely like Galt, more like criminally incompetent boobs that not only destroyed their companies but almost took the country down with it. Destroyers of capital and country they be.

Russell L. Carter October 21, 2009 at 10:43 pm

Calm down Gary. Imagine those mints on the bed at teh South Pole. It’s the details, remember? The things that make you, I can’t avoid this: special?

Barbar October 21, 2009 at 11:02 pm

And back to Alex’s great post, shouldn’t these noble heroes have gone Galt back when their companies started taking government money? Then through sheer strength they could have created their own car companies and financial institutions from scratch. Of course these rugged individualists would go on to crush their weaker competition. They are just so strong and robust.

It’s sad to see people with a comic-book-level understanding of the world. It’s especially sad to see supposed professional “experts” with a comic-book-level understanding of the world.

Max Kennerly October 21, 2009 at 11:09 pm

Go Galt, Wall Street, Go Galt!

Please, we beg you. You’ve done enough already, thank you.

Thomas Esmond Knox October 21, 2009 at 11:47 pm

One presumes that the executives in question have contracts of employment.

razib October 22, 2009 at 12:10 am

So if current executives are competent they will quit and the only replacements for them will be of lower quality. If they won’t quit, then you’ve stuck with bunch of failures and no one better to replace them. What a grand idea.

several of these companies (GM, AIG) look to be ones where we’ll never recoup our investment. i doubt there’s a big marginal return on competence, you just want someone who is capable of gently winding down these failures. these are public utilities now, they should be run like them.

Anonymous Coward October 22, 2009 at 12:19 am

I have to agree with badger, its banana republic style propaganda.

Brian Slesinsky October 22, 2009 at 12:57 am

I don’t see any numbers. Some questions: (1) Are these jobs are still paying over $1 million per year? (2) Do these managers have a rare and irreplaceable skill?

My guesses are Yes and No. It seems like there would be a large pool of talented managers who earn less than that and are willing to give it a go. Not to mention that it would be a good stepping stone towards working for another firm that pays far more; effectively they’re a feeder for other company’s corporate ladders as people get hired away.

So I’d guess that they get management that’s nearly as competent, but high turnover, as people in the top positions get hired away by other firms after a relatively short tenure.

Or maybe they’ll eventually find people who aren’t in it solely for the money.

razib October 22, 2009 at 1:13 am

The real question is whether it’s legal, moral, and ethical for the Pay Czar to enact and enforce the pay cuts.

aren’t we beyond that point? a world where there’s justice questions of justice are legit and warranted. in a world of socialized losses and privatized gains screwing people of those gains seems a rather abstract question. legally we can’t screw goldman sachs et. al, but we can screw these folks.

also, am i the only one who thinks it’s ludicrous to call these CEOs “galt”? isn’t galt working in R & D pulling in 100 K?

Bay Area Alan October 22, 2009 at 1:26 am

Alex – Good article and commentary. Thank you.

To the populist posters – My My! Bring out the torches and pitchforks. Obama has succeeded in creating a monster for the populous mob to blame and villainize for these problems.

Ignore, as SNL put it, the Jack and the Squat that this HOPE and CHANGE administration has executed beyond the nationalizations.

Certainly we will see a flight to quality whereby the high quality folks in these companies will leave to others.

This will leave the low quality folks in charge, to do the moocher bidding of the Obama administration.

I second the request to track this in actuality. Who of the top 25 leaves by each anniversary for better jobs? Who stays and how does the company perform?

This slow steady creep into increased government control and socialism continues.

Wake up frog, the water’s boiling soon.

agm October 22, 2009 at 1:54 am

We are so far beyond the reach of the market (whose tender mercies would have decreed extinction for these companies) that this is quite justifiable.

And really, BS. The captain is responsible for the conduct of his men. So yes, these titans of industry are responsible for what happened on their watch. Either they were complicit and deserve to be sacked ASAP, or if they didn’t know what people under them were doing, then they were negligent in their duties and deserve to be sacked. “Incentivizing” sad excuses for leadership to leave is a win, so the public would win either way, irregardless of what comes afterward.

And no, getting your company on a federal IV does not count as a success.

Nelion October 22, 2009 at 2:33 am

Nice testable prediction, isn’t it ?

Or maybe we should just consider that as a cost center cut.

mulp October 22, 2009 at 3:46 am

The real question is whether it’s legal, moral, and ethical for the Pay Czar to enact and enforce the pay cuts.

Well, let’s say times had been more normal and they could file for bankruptcy and get financing from the private sector. In that case, would you question whether it was legal, moral, and ethical for a government technocrat known as a bankruptcy judge to terminate employment contracts and enforce pay cuts?

The idea that filing for bankruptcy doesn’t mean the government takes over is willful ignorance.

Andrew October 22, 2009 at 5:46 am

No, bankruptcy does NOT mean the government takes over.

Just to be clear, as a voter and a taxpayer the government does not have my permission to take my money and use it for stupidity, bribes and bailouts without conditions (real capital conditions such as haircuts for bondholders and debt for equity swaps, not stupid conditions like pay cuts). Even these expeditions are a failure of government to have a faster, more organized bankruptcy system on the books. They do not have my permission to then change the rules after the money is given so they can extort those bailed out to implement stupid ideological policy.

The other failure of government is that they do not have a fast foreclosure system where home mortgages are speed re-negotiated. Foreclosure is an incentive EXCEPT in times like these. In these times we need debt restructuring and the government didn’t do it. If you really don’t believe the government is a monolithic entity then maybe you don’t blame Obama for being unprepared and not knowing what needs to be done. But I do. He’s off screwing with healthcare for one thing. And doing the wrong thing is never the solution to not having done the right thing. You kept the management in place. There is no point in making their jobs harder.

Jason H. Econ PhD, pay cuts are not ideological? Do you have a substantive problem with Alex’s economic analysis?

Tomasz Wegrzanowski October 22, 2009 at 5:57 am

Are you willing to start a prediction market on this? I’m quite convinced it won’t be the case.

Paul October 22, 2009 at 6:15 am

These people are overpaid and tainted, they aren’t going Galt or anywhere else. These firms should be in bankruptcy. I am an Objectivist and agree with mulp’s point about the bankruptcy judge.

giantslor October 22, 2009 at 6:16 am

LOL. You think Atlas Shrugged is real. That’s cute.

The pay cut is temporary. They’re not going to quit.

anon October 22, 2009 at 7:06 am

I have to say most of the comments about seizing these people’s assets are infantile. With the miraculous powers of government that somehow could not see this coming we are really proposing to:
(1) Discern who is genuinely talented and does / did a good job; or
(2) Seize assets from all of them regardless (tantamount to taking away a restaurant manager’s savings if the restaurant goes bust)
(3) Set pay levels going forward for the workload and skill base required for hundreds or thousands of jobs and assume that it’ll be “fine” because there won’t be enough jobs for these folks

B Lee October 22, 2009 at 8:15 am

Let them leave, graveyards are full of irreplaceable people.

Randy October 22, 2009 at 8:24 am

Going Galt isn’t the right comparison. These people aren’t the Galt/Reardon types, but rather, the Jim Taggert types. It won’t surprise me at all if they don’t quit. They should, but they won’t, because as long as they’re in the political game they still have a chance to twist it to their advantage.

Mark October 22, 2009 at 8:46 am

Another one of Alex’s testable predictions.

Like his claim ‘fundamentally there was no housing bubble’ or people who wanted stricter credit standards were ‘credit snobs’.

Riding on Tyler’s coattails all the way…

Dave Culbertson October 22, 2009 at 9:07 am

I don’t agree with the prediction that these “highly skilled” executives will leave for green pastures. Who would want them?

As for the myth of “we must pay more or we will lose talented people” Seth Godin took that on a few months ago when this idea was first being discussed:


David Whitaker October 22, 2009 at 9:50 am

So, people who used to make $10 million a year are going to be forced to work for a paltry $5 million? Boo hoo. They’re going to quit in droves? Where are they going to work, Lehman Brothers?

Vehical Driver October 22, 2009 at 10:09 am

Badger is 100% correct. This is political theater. CEOs will continued to be highly compensated through other means… but it will satisfy the knee-jerk class-warfare folks with a comforting propaganda news story and those kind of folks probably won’t bother to look any deeper.

Dave October 22, 2009 at 10:22 am

Not Fannie Mae and Freddie Mac? An interesting omission.

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