Gone, gone, gone

by on October 23, 2009 at 7:05 am in Current Affairs, Economics, Education | Permalink

At BofA and AIG close to a majority of the top executives whose salaries were to be cut have already left.  Nuff said.

"There's no question people have left because of uncertainty of our ability to pay," said an executive at one of the affected firms. "It's a highly competitive market out there."

At Bank of America, for instance, only 14 of the 25 highly paid executives remained by the time Feinberg announced his decision. Under his plan, compensation for the most highly paid employees at the bank would be a maximum of $9.9 million. The bank had sought permission to pay as much as $21 million, according to Treasury Department documents.

At American International Group, only 13 people of the top 25 were still on hand for Feinberg's decision.

A big hat tip to Ryan Lee for the link.

1 capitalistimperialistpig October 23, 2009 at 7:19 am

So 23 out of 50 is a majority? No wonder I can’t understand economics.

2 Alex Tabarrok October 23, 2009 at 7:45 am

I thank capitalistimperialistpig for the correction (I first read the quote as the number of people who left rather than the number who were still around.) Not to worry it will soon be a majority who leave.

3 Eric H October 23, 2009 at 7:57 am

An “ideologue” is someone who has biases. I’m pretty sure that means everyone, though it is clearly stronger or more obvious in some. I find it very interesting that the people who most quickly level the accusation of “ideologue” are frequently the same people who believe in things like “libertarian paternalism” and “second bestism” because of market failures which are frequently rooted in bias. In other words, they believe that everyone has biases and needs to be saved from them. Or more precisely, they believe that everyone **else** has this problem.

But I might be suffering from confirmation bias in that observation.

4 tony p October 23, 2009 at 8:12 am

I don’t like what was done and hope it will never happened again. Its a gross overreach. Would not do it myself or vote for anyone who would. That being said, I have no issue with the results. There will be more “talent” to fill the void.

5 C October 23, 2009 at 8:27 am

capitalistimperialistpig, do you work here?

6 Anon October 23, 2009 at 8:28 am

Tyler said that there is very little evidence that executive compensation contributed to the meltdown. To my knowledge, Alex hasn’t posted on this.


7 Jason H. October 23, 2009 at 8:56 am

Eric H.

I think my earlier comment on Alex being an ideologue struck a nerve, and I wish I hadn’t said it because it really wasn’t the point I was trying to make. I have no problem with Alex’s political or economic views. In fact, I am sympathetic to a great many of them.

My problem with Alex is not so much that he’s an ideologue but rather that he’s a *crude* thinker. And as with any crude thinker his posts are utterly predictable. I can read the first line of anything he writes and I already know what he’s going to say. Boring. It’s like being in the lunchroom with a bunch of 20 year old Cato Institute interns. Someone with a more nuanced mind – Tyler for instance – could make the same points Alex does but in an interesting way, a way that makes unexpected connections/observations, a way that raises the dialogue.

Anyway, I only come here to see what Tyler has to say. Tyler, unlike Alex, often surprises and edifies. And I regret being a bit mean-spirited about Alex’s inanity, but it’s annoying to have to wade past his nonsense to get to Tyler’s posts. I wish I could block him like I can block David Bernstein – another crude thinker – on Volokh.

Jason H.

8 anonymous October 23, 2009 at 9:06 am

The important point is that unless the 23 left in the last 36 hours, they didn’t leave because of the planned restrictions on compensation – they left because they were fired, or because they thought the organizations were no longer a good fit for them


This isn’t sensible. People leaving before the restrictions go into place are an argument against the restrictions? […] the “cost” of having these people leave was already sunk

This is disingenuous. In an industry whose bread and butter is sniffing out industry trends and inside information by hook or by crook and profitably acting on it before everyone else does, is it really possible that none of these folks knew in advance (or at least anticipated) what was to come?

9 anon October 23, 2009 at 9:23 am

Again, you guys are killin’ me.

First you said that they wouldn’t leave. Now here’s proof that they left. Now you say that this doesn’t count because they left too soon.

That’s the difference between the highly talented and you. They read the writing on the wall quite some time ago and left. It’s that sort of vision that made them valuable — and makes them valuable somewhere else.

It is your inane thinking that caused Andrew Hall to say, “sell my unit or I walk.” You chased out a $380M/year on average cash cow because he got paid $100M after a particularly good year.

The barn door is still open and all the producers are leaving.

10 Ryan October 23, 2009 at 9:28 am

Is it really so hard to just say “Alex was right?”

11 Joe October 23, 2009 at 9:34 am

The real shame is that the board of directors and shareholders are unable to accomplish this on their own! Most corporations seem to be run run as piggy banks for the CEOs, where pay for performance has no real meaning (all of those executives should be on the street anyway). And I know from experience that it takes someone very special to mess up as much as those clowns at AIG..anyone could do those jobs…and do them better than they were done…

12 tom s. October 23, 2009 at 9:40 am

So they’ve left. So what? I think this is where there is a big disconnect between the financial world and some of the rest of us. So you don’t have the best people? I just don’t care. I’d rather pay more to firefighters and get the best firefighters than pay more to the top bankers and have the best top bankers.

13 Brian October 23, 2009 at 9:45 am

Ummm… I fail to see how this is a bad thing. People will step into these jobs – maybe even people less concerned with stealing as much money as possible from a company and more concerned with making the company work.

14 songar October 23, 2009 at 9:49 am

Jason, I would remind you that 1/You’re free to voice your opinions–constructive or otherwise and 2/ You don’t have to read Alex’s posts.

If you’ve ever watched TV, you know how this works. When you don’t like the show, you switch the channel. Ex: I don’t like Fox News; I watch MacNeil/Lehrer. Now, here’s how that principle applies to this blog. The author is noted in red at the bottom of the post. When Tyler is the author, read the post, and when Alex is the author, don’t read the post.

You’ve likely wasted more time writing this one rather boorish criticism of Alex than you’d ever waste in a year or two of simply checking the author’s name and–when it’s Alex–clicking away to another site.

15 anon October 23, 2009 at 9:54 am

dont let the door hit you on the way out.

16 Mark October 23, 2009 at 10:29 am

I agree it’s highly problematic for the government to dictate terms of compensation. I also agree this plan is likely to fail to produce its intended changes in executive behavior.

That said, where I think I differ with Alex is his default assumption that these people are paid extraordinary sums because they are highly creative, intelligent individuals who produce great social value for society. My reading of his world view is that the market is accurately reflecting the value they create for their firms, and to some degree, to society at large.

I largely disagree. I think the past few years have amply demonstrated that much of the financial industry is in the business of: a) taking advantage of ignorance and greed by creating ‘products’ that only appear to offer actual value, and b) taking strategic, but excessive risks with other people’s money while relying on implicit government guarantees. I believe executives at these firms understand what they’re doing, and have structured their compensation so that they pay themselves very well when their strategies are ‘working’, but are shielded from the inevitable losses.

17 Ryan Vann October 23, 2009 at 10:43 am

Does Feinberg even have any authority to lay down these dictates? More specifically, was his position one that was confirmed by the Senate? Perhaps my understanding of executive positions is shoddy, but, the way I understand it, the potus may staff anyone he wants as advisors, but only confirmed appointees can wield any authority. If my understanding is correct, and Feinberg has not been confirmed, I see this whole fiasco playing out in courts real soon (I see it going to the courts regardless).

18 ryan October 23, 2009 at 10:50 am

i don’t get it. they left before the announcement was made. that’s because the companies had already been run into the ground and they doubted the long-term viability of the company. it has nothing to do with the announcement of pay guidelines, right?

19 Mike S October 23, 2009 at 11:00 am

“These folks don’t need Citi or BoA, it is the other way around. They aren’t employees in the sense that they punch a clock and do what they’re told. Instead, they are self-sufficient engines that generate revenue

This is not true. Without BoA, they don’t have access to cheap funds. Without the network, they don’t have access to the information flow.

How many “traders” set out on their own and fail? Hundreds? Without the deal flow that these banks get, most people wouldn’t make money.

By your logic, there would be nobody working at these banks. They could all make more money on their own.

Additionally, we propped up this industry with hundreds of billions in cash, and up to $2 trillion in value for the loan guarantees.

This is hundreds of times more than we gave the car industry or any other industry.

20 Bill October 23, 2009 at 11:08 am

Obviously, this audience does not have many members whose relatives or friends work on Wall Street, or you would know that there are many talented persons eager to replace those who left. It is not talent, in some cases, which is the asset that one has, but rather connections with the client that the departing person takes with them. But, what is not surprising, is that there has been little client defection due to some of the changes. Indeed, some of the acquiring banks, such as Deutsche Bank, have found that they have acquired high priced talent on speculation, and that there has not been client migration because the client views the firm and the complex of individuals (not just one individual) as the asset, and not the “rainmaker” who often had simply suceeded the original rainmaker. What you are beginning to see now is the departed rainmaker trying to recruit the team under him/her in order to transfer the client, but since those salaries are not regulated, there has been less movement.

It will be an interesting study to look a few years from now and see whether clients, and not highly paid execs, moved to other firms.

21 S Andrews October 23, 2009 at 11:39 am

Of course Jason H would prefer to read Tyler’s posts. He says he is ticked off that he has to “wade” through Alex’s posts to get to Tyler’s. LOL. I have to do the opposite. I think Jason is Myopic. Any half regular reader of this blog knows that Tyler blogs 4-5 times ( if not more ) as many posts as Alex. I find Alex to be more principled and Tyler to be more wishy-washy, willing to go in the direction where the wind blows.

22 anon October 23, 2009 at 11:57 am

“control group anyone? what’s the average turnover for these positions?”

In the [fortune 500] company I work for the top 25 earners probably have a 5% or less annual turnover. Same would probably go for management jobs in the whole company.

“promulgataed collectively to perpetuate the perception of unique skills.”

My guess if you have never managed people or perhaps have not really understood that talented up and comers under you leave because they feel there is no way to differentiate themselves in terms of compensation. I apologise if this assumption is mistaken. In my experience there is a pretty massive difference between “good” and “ok” performers in terms of output – the 80:20 rule applies. 20% of staff give 80% of value. I’ve managed hundreds of people, but yeah, before anyone points it out I’m just one source. All that being what it is, I am NOT saying that all of the people impacted by these pay rules “deserve” their paychecks or indeed are talented. The tragedy in what is happening is that its happening to folks who are talented and working hard just as its happening to those who maybe “deserved” to be taken out. Quite simply this is the reason the policy will not accomplish its aims. I agree with Alex.

“The simple fact of the matter is that every business operates under the principle that no one is irreplaceable, and no one individual or even groups of individuals dramatically affects the profitability or direction of the firm”

I absolutely agree. If one person leaves my team I really don’t care, even if they are a superstar. That is because we would be cultivating successors, the team is more than the sum of its parts etc. On the flipside my organisation would be utterly destroyed within months if a government “paymaster” came in and forced me to indiscriminately cut everyone’s pay in half. I’d be left with the worst half whereas the best would be gone in a shot.

23 David Heigham October 23, 2009 at 12:13 pm

This looks like the strongest buy signal yet for AIG and BofA. They should be a lot more viable with mangement who are not over-confident.

24 Ryan Vann October 23, 2009 at 12:18 pm

“control group anyone? what’s the average turnover for these positions?”

This comment almost escaped me, but I do think it is a relavent question. High reward jobs often have a high overhead.

25 PJSam October 23, 2009 at 12:54 pm

“…My guess if you have never managed people or perhaps have not really understood that talented up and comers under you leave because they feel there is no way to differentiate themselves in terms of compensation. I apologise if this assumption is mistaken….”

Grossly mistaken but no point in chest beating in an anonymous internet post.

Yes there are stars and workers bees, but where you make your error is equating stars with “value creation.” Unless you’re basically arguing Marx – that all value comes from labor – the organization itself, its capital structure, and its overall collective purpose and raison d’etre generates the vast majority of any value created regardless of the individual contribution.

As a rule of thumb 80:20, is usable but in almost all cases it doesn’t relate to value creation. One might be able to argue that 20% of the employees are 2x (pick your ratio) more efficient or productive than other employees, but you don’t pay them 10x more, because you’d be better off replacing them with 2 bodies resulting in a much reduced unit cost of production.

The reason why stars are often stars, is because the organization provides all the necessary support structure for them to flourish. But they don’t leave or cant’ leave because they don’t have the necessary skill sets to either succeed in a different environment or go out and raise the capital to build their own support organization. Further, even if they could raise the capital, they then find themselves in positions where either they no longer are devoting the time to the activities which made them stars and/or are thrust into positions of executive authority where they have no training and expertise to fill.

The place where stars do have some equivalence to value creation is those relatively rare situations whereby the individual is creating something practically anew from their unique gifts, almost wholly apart from the organization support structures.

To differentiate the two situations, imagine yourself as an inventor. Unemployed inventor comes to Company with new sure thing, whizbang gizmo. What is the profit split? Inventor can’t manufactuer and market so it has to give up something. Now imagine inventor as employee who hasn’t thought up anything yet, but one day does. Organization has been supporting inventor for years, nuturing, training, providing a stable income stream and freedom from fear. Inventor still can’t manufactur or bring product to market. What is the profit split?

The point is that there are very few “true” stars. All of us collectively rely on the organization and the organization should reap the benefits. If one’s contribution is continuously disproportionate, they should move to do it on their own, to capture a larger portion of the benefit.

Yet, what we’ve seen over the past 20-30 years is that management has collectively put their thumb on the scale as to extract excess compensation relative to their contribution from customers and shareholders.

26 citi.zen October 23, 2009 at 1:09 pm

Simply looking at the numbers doesn’t tell us anything about quality. Care to take a wild guess which people leave and which ones stick around in these cases? What does that say about the average competence of the leadership post-salary regulation?

27 Tom October 23, 2009 at 2:01 pm

Who cares if they’re gone? They ran the companies into the ground. What are they going to say in their next interview? Well, I have experience running a great, multi-billion dollar company into the ground, I would be a perfect fit for your company?

28 Anonymous Coward October 23, 2009 at 2:19 pm

Oh, no, its actually even worse than you say.

They are leaving for firms that have already repaid the bailout. Didn’t GS already repay theirs, or am I mistaken?

29 Anonymous Coward October 23, 2009 at 2:26 pm

Anyway, good call Alex!
The people who doubted your prediction should be eating crow now, but alas, they are launching personal attacks instead:-(

To those who are launching attacks on Alex, this is MR, the comments are supposed to be witty and enlightening, don’t launch personal attacks instead.

30 babar October 23, 2009 at 2:45 pm

i think these people leaving is recalculation, not a response to expected wage deflation.

31 David Sucher October 23, 2009 at 3:27 pm

“At Bank of America, for instance, only 14 of the 25 highly paid executives remained by the time Feinberg announced his decision. Under his plan, compensation for the most highly paid employees at the bank would be a maximum of $9.9 million. The bank had sought permission to pay as much as $21 million, according to Treasury Department documents.”

You can’t find good people for $9.9 million per year? I think you can.

Tyler, will you work for $9.9 million per year? Plus (I assume) benefits? And high prestige? Access to a huge range of people?

32 John Pertz October 23, 2009 at 4:01 pm

It is threads like these that let me know how big of a struggle it will be to fight the Obama administration and their supporters. The rationality ruin on display in this topic is unsettling to say the least.

The plain economics of the Obama’s administration’s decision to regulate pay was extremely poor. There is no doubt that Larry Summers and the rest of his advisors told him that this was AWFUL policy. However, sometimes AWFUL economic policy makes for great political policy. The democrats in this topic cant stand such a cynical characterization of their man but the results leave no doubt.

Also, when we say companies and executives, these are very generalized words. If you want to argue that XYZ executive at XYZ firm is clearly culpable and does not deserve his or her job then that is fine. However, to simply write off every last executive at these these firms as idiots, undeserving of defense, leaves a lot to be desired. Also, I would be extremely interested to hear the Obama’s administrations rationale behind arbitrating who deserves a pay cut and who doesnt.

33 tom s. October 23, 2009 at 4:12 pm

anon – “They aren’t employees in the sense that they punch a clock and do what they’re told. Instead, they are self-sufficient engines that generate revenue”

I had a discussion with a City friend of mine recently. He said that without these big incentives, who’s going to get up at 3am to cover a position when something changes in Singapore? (I may have the jargon wrong). My response – if firefighters don’t need a big bonus to put out a fire at 3am, why are these traders different?

On a related note. You think the rest of us are clockpunchers? You’d be surprised at how hard some people work for non-monetary incentives – Alex and Tyler for two, I would guess. What’s most likely to stop me working hard is knowing that some people get to be paid millions for their hard work – then I’m no longer being a professional by working hard, I’m being a sucker.

34 mulp October 23, 2009 at 4:41 pm

Let’s say that instead of giving TARP funds to AIG and BofA, AIG filed Chapter 11, and BofA went into receivership under FDIC resolution.

AIG was too big to sell, and the credit markets too frozen for it to be liquidated, so I’d say it would be reasonable to expect AIG would be run by that government technocrat called a bankruptcy judge for years, and he would have been deciding what employment contracts were honored and what new employment contracts would be allowed.

Can anyone point to any large bankruptcy case where the judge authorized contracts without reveiw, or reviewed and authorized contracts that were richer than these? How in Feinberg’s application of the law any different than a judge’s application of the law if AIG were in Chapter 11?

If BofA hadn’t gotten the TARP capital infusion, then the law requires it be taken over by the government and the assets be disposed of with the least loss to the FDIC insurance funds and the member banks that fund it (unless the Fed and Treasury call for resolution without regard to the increased fees on banks to repay the losses from quick resolution that increases the FDIC losses). Given BofA’s size, and the credit market, and the lack of capital by al other banks, BofA could not be sold quickly, so FDIC’s resolution operation would operate BofA while they dismembered it, sold it off, and did whatever else was prudent to recover maximum value. In the S&L crisis, resolution took more than a decade.

Anyone have examples of banks in government resolution paying the bankers huge bonuses in the tens of millions?

Isn’t BofA management getting a great deal relative to what they would get if the FDIC took over and a government technocrat were supervising them?

35 Barbar October 23, 2009 at 5:51 pm

Well, the stock price might be a useful indicator, but then again obviously the stock price can move for reasons other than any particular executive’s actions. After all, these companies crashed despite having all of these Herculean executives on board. Which means it makes for a great “heads-I-win-tails-you-lose” argument (nobody who thought that the stock market dip on election day was terribly significant has been impressed by the prolonged stock market rally of Obama’s Presidency).

Here’s my objection to Alex’s posts on this topic. They really have nothing to do with economics, and everything to do with politics. The disagreement in the comment section is fundamentally about the legitimacy of government action in this area. Sure people respond to incentives, but that doesn’t mean that every pay cut in the history of the universe has had catastrophic consequences. This idea that GM executives are incredible supermen who do things that mere mortals cannot seems to arise out of hero-worship.

If economics were a legitimate science, then Alex would be pulling out the empirical work about executive pay and going into great detail about it. Instead with some hand-waving about a trashy novel, he’s able to make it seem as if the world’s going to hell in a handbasket. This is ideology, not science.

36 Charlie October 23, 2009 at 6:16 pm

Shouldn’t stock prices give real time data upon how costly this market intervention is? I’m not sure what the relevant dates or companies and comparison companies are, but as news goes forwards it should be an interesting case study in how important these execs are to the value of the firm.

37 Mort Dubois October 23, 2009 at 8:11 pm

Were they hard to replace? Has there been any observable effect? Without this information, there’s no reason we should care. The NFL has astounding turnover every year, but the football games are still just as interesting to watch because it turns out that there’s a lot more talent than available positions. I’d be astonished if this wasn’t true in the financial world as well. The level of compensation isn’t necessarily indicative of a shortage of able people, but rather the ability of those at the top to game the system and set their own compensation. I’ll confidently predict that even if compensation is capped there will still be able people to fill those jobs.


38 Ricardo October 23, 2009 at 8:32 pm

Correct me if I am wrong, and BTW I am a capitalist and an objectivist, but this executive “talent” that is leaving are the same folks who had a hand in running these businesses into the ground with their government comfy Ivy League liberal MBAs (I work for a major, major private financial company and these leaders are total jokes in my estimation-us highly educated but down to earth middle management chuckle at their Orwellian speak every day) and I am supposed to be worried about them leaving?! For what? The chance to go to another financial firm and keep their homes in the Hamptons and continue to screw things up?! No chance. Welcome to the unemployment line if possible.

39 Bernard Yomtov October 23, 2009 at 10:40 pm

Shouldn’t stock prices give real time data upon how costly this market intervention is?

Yes. In fact the immediate price reaction tells us more about Wall Street’s assessment of the impact than any other data.

I’m not sure exactly what the appropriate time frame for looking at the price impact is, but surely, if this policy is as big a catastrophe for these companies as Alex thinks that should show up as a big (suitably adjusted) price drop in a short time period – a few days perhaps.

Prices, they tell me, convey information in a remarkably efficient and compact form. I’m pretty confident Alex would agree with that. So what are they telling us here?

40 Jason October 24, 2009 at 2:18 am

@ Mike S

Yes, people who are able to creatively and effectively allocate capital are likely worth many times more than the “average worker”. For example, an investment banker who can save a Company $25mm in interest expense per year, apply a 10x multiple (implied 10% discount rate), just created $250mm of value to the firm. Same cannot be said of the guy who assembled the widget and can be replaced in a heartbeat.

41 Chuck October 24, 2009 at 11:06 am

“The graveyards are full of indispensable men.”

How do you know this is exogenous. It is likely related also to the hopeless situations their banks are in. It’s not so much that they are leaving because of earnings potential today, but because of earnings potential today and tomorrow.

42 Barbar October 24, 2009 at 1:24 pm

Shane, of course, that’s the whole question, isn’t it? But Alex’s move here is classic: pat yourself on the back for recognizing the existence of tradeoffs, as if that exonerates you from the responsibility of quantifying them.

43 Barbar October 24, 2009 at 3:32 pm

It’s really astonishing that some senior executives have voluntarily choosen to leave thriving companies like AIG and Bank of America in the past year. That just goes to show you how disastrous Obama’s Presidency has been.

Further evidence for how much of a banana republic we’ve become under our commie socialist leader —
S&P 500 on inauguration day: 805.22
S&P 500 today: 1,079.60

After all, who would want to invest in an American company with Obama in charge?

44 Barbar October 24, 2009 at 5:13 pm

AIG Stock Price up over 40% since inauguration day. May dear leader Obama continue his wise leadership of that company.

45 Dave October 26, 2009 at 10:10 am

The best way to ensure dramatic government interventions like this aren’t necessary in the future are to go back to the 75% marginal income tax on the top bracket.

46 estetik October 27, 2009 at 5:00 am

They had to leave… Since they were fired, or they thought the organizations were no longer a good fit for them, or that’s what such people do.

47 MediaMentions November 7, 2009 at 4:43 pm

Even with the restoration of the economy, salary cuts and layoffs continue to be a problem as confirmed by your article and this one over here: http://www.pressdisplay.com/pressdisplay/showlink.aspx?bookmarkid=DI6F0HEKUDF6&preview=article&linkid=67a35dc8-983d-4a4d-b41d-7e42dc813c60&pdaffid=ZVFwBG5jk4Kvl9OaBJc5%2bg%3d%3d

It would be nice to find an easy solutions to satisfy all don’t you think?

Best regards,

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