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.
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These people destroyed billions of dollars of value and you’re *worried* that they will go somewhere else? If the private sector had any ability to detect competence, people like Roubini would be running major banks (and would have steered them away from the cliff) instead of being scoffed at by eternal-bull worshippers until after the explosion. The incompetence of the management of *insolvent companies* (which is exactly what they are but for government intervention) should not really be in that much doubt.
There’s no evidence that higher pay attracts more competent managers (competent at anything other than self-promotion, that is) or that most managers (other than startup-entrepreneurs-turned-managers like Gates or Jobs, and only a tiny fraction of them actually succeed to that extent) add much value in the first place. Replacing them with cheaper managers is almost guaranteed to be an improvement and the only reason the shareholders haven’t already done that is that shareholders aren’t actually in control of most corporations.
IMO, the main problem with this plan is that the current management is allowed to stay on at the restructured compensation; I would have preferred to fire anyone who greenlighted the 2005-06 era business practices of these institutions and replace them with someone more cautious, in addition to the pay restructuring that reduces the incentive to loot the company and run to the next victim.
This is where the blog and I depart fundamental philosophies. Implicit in your title, ‘Going Gault’, is that the departure of these Masters of Capitalism, forced into the shackles of oppression by the tyranny of the ignorant and spiteful mass, fundamentally hurt the economy by depriving us of their brilliance, motivation, etc.
Of course, I have not forgotten the actual real world outcomes of these folk. Not that I actually think they will leave, but if they did, I would think, based on a past track record, for this to be an admirable consequence of the plan, not as a silly impossibility. Hence my earlier comment about philosophies departing.
Even though I hate most of what the government does lately, I really don’t mind this idea.
1. It will reduce some moral hazard with the Too Big to Fail idea.
2. It, in a sense, rewards all those other banks/companies that did not do poorly. ie They will be getting the skilled execs from these other companies for cheaper than they normally would have to pay them.
I don’t want to depress you Obama voters too much, but under certain fairly realistic conditions, huge increases in taxation might lead to less work, less effort, and lower productivity.
“bonuses have fallen so dramatically that they might have to call a cab instead of take the company limo. ”
Interesting tangent alert: My girlfriend was in Toronto for an educational conference, and, to get from the airport to her hotel, it was actually cheaper to purchase a limo than it was to pay cab fair. In my experience, cabs seem rather expensive, on a per mile basis, when compared to other transportation options (public transport, rent-a-cars, limos apparently).
There, I fixed that for you!
No one here cares about the CEOs. That is your imaginary straw man. What we believe is with some knee-jerk reaction to punish a scapegoat, you could do something that is going to further hurt the economy and thus further hurt millions of innocent people. Real life isn’t some cheap morality tale. Hyperbole about “gold plated yachts” and such might be good enough to fire up the lynch mob, but it is piss poor economics.
Despite what your Marxist ideology told you, the interest of the “working class” and “capitalist class” are not diametrically opposed. There is no evidence whatsoever that hurting CEOs for its own sake will create any benefits for working Americans. This is revenge fantasy, first and foremost.
Not that any of it matters. Obama and the Democrats went out of their way to explicitly ensure CEO bonuses where not touched by the bailout… they aren’t going to sell out their CEO cronies now just to satisfy some temporary outrage among the plebes. They are going to concoct some political theater policy that makes it look like they are being “tough” on the CEOs, while leaving more than enough loopholes so that the CEOs will continue to be as well compensated as ever. This policy is designed to fool people like you.
J,
What you proposed (100% tax on income over $250k for bailed out execs) constitutes at least three constitutional violations.
First is bill of attainder, since congress can’t target specific people for taxes/criminal punishment.
Second is equal protection, since the tax law has to apply equally to everyone, regardless of where they’re employed.
Third is ex post facto. You can’t pass a punitive law after the fact of the bailout.
I also want to point out that the backlash against Alex in this comments section is testament to the state of “intellectual” “discourse” in the world today. The fact that they all seem to go for Tyler Cowen’s more “harmless and bemused” style of playing with economic facts reveals that there really is only one socially acceptable way to talk politics in this day and age.
To be perfectly clear: What I mean is that many of you absolutely lose bowel control when someone suggests that there might actually be an objective right and wrong.
The world can’t handle that these days. Sad, really.
fusion: Who at GM now “lost billions of dollars and nearly destroyed the economy”?
The seeds of that little disaster were sown long before the current executives were in charge – probably before most of them worked for the company at all. GM’s been doomed for decades, barring the sort of action that nobody dared take.
Similar things are true of various of the financial companies; many current executives at the top were hired to clean up the current mess or after the original bad decisions about leverage and securities were made by others.
(For example, take AIG – where only one unit of the company had a problem with bad debt, and made the whole unable to get credit.
Why should someone at another division at AIG be salary-capped for actions he had not only no power over but indeed no knowledge of, starting years ago – when the other person has in fact been doing an excellent job at making real profit and real value for the company and for shareholders?
If only it were as simple as “they guys getting the bonuses caused the problem, so screw them”, eh?
It’s a good populist soundbite, but it’s deeply flawed if presented as an actual assessment. At very least, this is true of the two cases I know much about the details of, AIG and GM.
That said I’m also not as worried about harmful outcomes as Alex.)
There certainly seems to be an assumption that the financial crisis was the result of individual incompetence rather than institutional failure due to moral hazard and mis-regulation. Bank of America was forced by the feds to go through with a purchase of Merrill Lynch in spite of due diligence that led them to have second thoughts. There is a growing literature on what happened and why. Most of it does not support this action but there is little literature outside of Rules for Radicals that supports much of the Obama program. The housing bubble was a result of government policy, not individual incompetence although some very astute people managed to avoid it.
Some people consider the destruction of the American financial system a bug.
Some see it as a feature.
Part of the plan to destroy the culture of America and turn the country into a third world semi-dicatorship… nanny state on steroids sort of thing.
Liberty and freedom be damned… we will be taken care of by the grandpoobahs of congress – and if we don’t go quietly… they will destroy us.
Or at least try to, anyway.
A lot of you dimwits fail to realize that many of these companies have diverse income streams. While a limited number of these people may have failed in their positions unfortunately resulting a huge loss of money, there were parts of the company that did make, and continue to make, profits for the company.
These mindless restrictions are being placed on businesses within the company that had nothing to do with the huge losses and were/are keeping the company afloat.
The folks who lost the money are long gone. So they’re just penalizing folks for being in the industry.
Citigroup recently had to sell off their oil trading business because their head trader, who was making them a fortune, was being contractually compensated for making the company a lot of money. So to punish “the industry” in general, these companies are being forced to punish those who actually are successful.
Good job, pinkos. LOL. You’re just making sure these companies die off. The talent who make the money are simply going to go somewhere else where they will be compensated for the money they bring in.
All the “A” level players have long ago departed these companies, leaving “B” players at best. Now, the “B” and “C” players will depart for greener pastures. Why work hard for nothing? All that remains are the losers. Anyone who would run one of these companies for $200K per year is by definition incompetent.
I’d say it’s a result of unintended consequences, but this is the fully intended result of remaking the US into a Socialist/Communist country. They know exactly what they are doing.
Hmmm. I don’t see GoldmanSachs on the list….
This simply represents a new investment opportunity. Shorting these stocks will be some of the easiest money you can make. Most of you do not understand how management works at these compensation levels. (Yes, I do, because I work with people like these.) They are all getting calls now from headhunters, the really comptent ones will go first, the others will follow as they identify opportunities that have approximately equal pay and much better futures. These opportunities may be in the auto business here or overseas or may be in other manufacturing businesses. Some may retire. Yes, some will not find new positions and stick around, but do you think those will be the experienced competent ones? The government will wonder why the only management they can hire are those who have never run multi-billion dollar companies with tens of thousands of employees in a union environment. Those new managers will learn on the job and make more mistakes than the current management. We taxpayers will pay for it all as most of the companies tank and require more funding to keep the unions employed. Those of us shorting the stocks will make some money.
By the tenor of some of these comments, it would appear that they believe that the competence of the people in question bears any relationship to the trouble their companies got into.
I suppose it’s possible that they haven’t been following why what happened happened and who it happened to (just about everyone).
Is the head of AIG responsible for the Community Re-investment act which forced banks and financial institutions to loan money to those who, were they not so forced, they would not have — because the lenders knew them to be bad credit risks? (This, of course, is why they had to be forced to make the loans. Had they been good loans in the first place, the banks would have happily lent the money without the necessity of regulatory pressure from the federal government or from groups like ACORN.)
Then, after being forced to make these loans, are those financial institutions to be blamed for finding a method of passing those cancerous loans off to someone else?
And, are those who bought up those loans (in an environment where housing prices seemed to just keep going up…) to be blamed for doing so when it was so profitable AND the federal government jumped in with both feet via Fannie Mae and Freddie Mac (which, if it escaped the notice of the snarky commenters, were run by Obama cronies — some of whom currently advise Obama on economics — are they, TOO, “incompetent?”) and the banks seemed to have a federally funded “escape valve” in the event that things went sour?
Just about EVERYONE — from Congress to the smallest banks — had this “economy thing” figured wrong. They weren’t (aren’t) “incompetent” — they were WRONG.
It happens.
Or do y’all think that somewhere there is some great gaggle of “economic geniuses” out there who are somehow more qualified than those who have risen to the pinnacle of this profession?
Yah. Sure there is.
These guys will find a job somewhere where their expertise (such as it is, since NO ONE knows ANYTHING about “economics” in the first place — they just have EXPERIENCE in how the beast works MOST OF THE TIME) is appreciated and rewarded.
Amazing.
Make these bad loans, or else.
- OK.
Make more bad loans, or suffer our wrath.
- Uh, OK.
Hmmm. Bad omens. Take this phoney bailout money, now!
- OK, but…
Gotcha.
This reminds me of a T-shirt worn by crew member of mine that said, “The floggings will continue until morale improves.”
Most of these people are not incompetent (but nice talking point). I know, for instance, BofA had their arm twisted to take the deal that hurt them (they were doing fine beforehand). Other companies were basically sound but had one small division that ran the whole ship aground. On other hand, since your all such know it alls and know they’ll just be fine with all new management, well, that too is a testable proposition…. and we probably will get to test it after the government runs them out of their positions. Of course, when the companies ‘continue’ to tank and/or die off you’ll probably blame it all on the people you supported running off and not consider this action…
Mostly I think this is being done to focus our attention on the waste inherent in capitalism’s excesses, and distract us from the far greater excesses of government. (The TARP Special Inspector General’s report just hit, then this. Nice timing, huh?)
I think executive compensation is one of the harder things to value. Sometimes a great exec is worth way more than the mere millions he is paid, because his vision and guidance are that good. Sometimes he is golf buddies with the board, and he leads the company to mediocrity for millions.
The problem here is that this is ALL of the top 25 earners. No discernment is made for those who are leading their struggling companies out of mediocrity, the ones with vision and judgement. No differentiation between 25 at GM, and 25 at a smaller firm. It is crudely simple because the bottom line is not the point, the point is to make an ideological statement.
This is a central planning decision, and it has the deft touch and market savvy of Maoist economic administration. The problem is, in this one instance it might not be catastrophic, and so we will revisit this precedent down the road. Not good.
As for the exec’s ability to jump to another firm, I think I would be reluctant to hire anyone so stigmatized. Being a friend of the government is a great asset these days, risking that for one exec seems foolish. What, you don’t think they’ll hold a grudge? Ask Fox, ask Ford as it negotiates with the UAW(with its stake in GM.)
Comparisons to bankruptcy just beg the question: If government is taking over and reorganizing, why didn’t we just do that? Now we have this ad hoc limbo of semi-receivership, with rules made up or approved by politicians. One of the hallmarks of the rule of law is that everyone is under the same law. We should have thought, and should continue to think, about that more carefully.
The real talent will leave. And whats left will be the time servers and functionally equivelant bureaucrats. Those companies are dead men walking and eventually the government will tire of pouring money into those corpses, especially when congress changes hands. It would have been better for them to have gone in bankruptcy, shed the union contracts and worked out a deal with their creditors and suppliers.
Greed and envy are opposite sides of the same coin.
What this administration is doing to a few bankers is nothing compared to what it proposes for all medical practitioners. Of course, doctors are supposed to be motivated by altruism and embrace their financial ruin for the greater good.
These will still be high salaries after the cut, but the executives in those positions, for the most part, will find better elsewhere. Then the White House and DNC will move their cronies into those vacant positions. That is the nature of government-controlled businesses. Who do you think is at the top of the major Chinese corporations?
Y’all, I’m trying to learn something about this, and would appreciate knowledgeable comments about the role that US corporate governance played, and ought to have played, in executive compensation. Are corporate boards mere thralls to CEOs? Comparisons to successful corporations here and abroad are also of interest.
To all those here who challenge the notion that there just isnt any evidence of many going galt I have this to say about that.
Its not the type of phenomena that gets much notice as the kind of person who does so rarely feels the need to twitter about it.They just wake up one day and readjust there life in ways that get little notice by those around them. You could see this if you read the way dagny would bump into people who were actually in that mode but seemed to be going about their lives as if normal. So if you go looking for these folks and ask the right questions you may find them but dont expect a going galt group to jump out and suddenly announce the fact of their existence.Its a personal thing.
“These people were massive failures.”
Really? Was the main line of business of Citibank dealing in securitized mortgages?
One or two senior execs with ownership over very risky derivative business lines, and maybe the mortgage underwriting lines at some were massive failures at each company, and a few of the people with direct oversight – the CEO and CFO, and one or two others would have been responsible. That the owners of the other lines of business – municipal bond investment, corporate finance, student loans, whatever – are somehow responsible for running the companies into the ground and deserve to be punished, is an ugly bit of populist mouth foaming. Why not just hang ‘em all, let God sort ‘em out? It’s the same reasoning. Unspoken here is why the power to abrogate pre-existing contracts on an arbitrary basis is thought to belong to the government. Due process? Notice and hearing? Right to petition for redress of grievances? Administrative Procedure Act? I guess that rule of law BS doesn’t matter once we’ve got the torches lit and the pitchforks honed.
Ok, Vikram Pandit is going to quit because he is only getting a couple million THIS year instead of tens of millions? Here’s my response: 1) good riddance; 2) rats, he’s not actually leaving
Obviously, you have overlooked the fact that these people are working at the taxpayer’s pleasure. And their firms would not be extant without public money. No need for you to be a dick about it.
“most of these executives will quit and get higher paying jobs elsewhere”
Yes, because in this economy there are just SO many high paying jobs just waiting to be filled.
“Will the administration then order people back to work?”
They’d hire new people. Sounds like a great way to reduce the unemployment rate.
Going Galt
“No Jules, you’re gonna be like those pieces of shit out there who beg for change. They walk around like a bunch of fuckin’ zombies, they sleep in garbage bins, they eat what I throw away, and dogs piss on ‘em. They got a word for ‘em, they’re called bums. And without a job, residence, or legal tender, that’s what you’re gonna be…a fuckin’ bum!”
Vincent Vega
Pulp Fiction
I want to know why economists rail against cutting executives pay but are all for cutting workers pay. Won’t the workers leave too?
Didn’t take long for Alex’s theory to be proven correct:
http://www.washingtonpost.com/wp-dyn/content/article/2009/10/22/AR2009102204422.html
“Top employees leave financial firms ahead of pay cuts
Grass is greener where bonuses are sky-high
By Tomoeh Murakami Tse and Brady Dennis
Washington Post Staff Writer
Friday, October 23, 2009
NEW YORK — Even before the Obama administration formally tightened executive compensation at bailed-out companies, the prospect of pay cuts had led some top employees to depart.”
1. No economist supports the lowering of worker pay on principle. None. They only exist in your imagination.
2. There is no politicians and no political parties that advocate the government lowering pay for workers. None. They only exist in your imagination.
3. No economists are against lower CEO pay on principle. None. They only exist in your imagination.
4. In Marxist terms, the government consumes more worker surplus value than does capitalists. The government takes nearly half of what most people make through direct and indirect taxation, where as most corporations couldn’t afford to increase pay more than a few percent because profit margins are thin. The only way to increase the pay of workers in any significant way is to tax them less.
The world isn’t that simplistic. You want some easy rule that a government commissar can use while making his five year plan for the economy. In reality, the economy is simply too complex. In some cases pay will correlate to performance, in some cases it won’t correlate to performance, and in any case metrics for “performance” are highly subjective (is “performance” represented by share price? By profit margin? By absolute profits? By how many jobs the company creates? By “social good” created? By how little pollution is produces? And why should your criteria be the universal criteria that all people should be forced to follow?).
The government chiefly caused the economic damage, not the bankers. Bad government-mandated mortgage loans, cooked books of Fannie and Freddie. The creators of those mortgage-based derivatives were partly at fault, since they were buying insurance policies on things in which they had no insurable interest, but the government, usually ready to over-regulate, failed to oversee that, and Congress wouldn’t let the Bush Administration enforce regulation over Fannie and Freddie.
While government has a basic responsibility to prevent fraud and abuse, it is a big mistake to assume that government officials are more moral or ethical than corporate officials. Especially this government.
What Obama, Geithner, Feinberg and company are doing is unconstitutional and disgraceful. The sad thing is that no one seems to be able to stop them, and the principal victims are probably not going to protest. Sad days.
I don’t believe that this will fix anything. Sure these pay cuts will save these companies money, but this will do nothing for the actual executives. These companies were given the most assistance during the year, but most likely while they were getting assistance these top paid executives have been saving money. So I don’t believe that this will hurt the executives that much and if it does they will probably quit and go elsewhere to get paid their high salaries. In the long run I think that these pay cuts will not break these executives forcing them to get another job or stop them from feeding their kids.
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