One effect of President Obama's $500,000 salary cap on the executives of bailed out firms (if it has any effect at all; Gary Becker thinks it won't) could be an exodus of human capital from the top echelons of the finance industry.
A new paper suggests that talented people are likely to leave finance in droves anyway, once tighter regulations set in. Contrary to popular belief, bankers didn't always command sky-high salaries. Tomas Phillipon and Ariel Resheff found that, over the last 100 years, finance workers have mostly been paid wages proportionate to professionals in other industries -- except for two periods: in the 1920's through the start of the Great Depression, and in the 1980's through the start of this economic downturn. During the boom times, wages in banking skyrocketed and talent flowed into the industry. During the bust cycles, that wage premium vanished.
What kept down wages in between? According to the paper, the culprit is a strict regime of federal regulations on banking enacted in the 1930's and gradually repealed starting in the 1980's. The authors conclude that regulations on banking stifle innovation, which keeps down earnings and wages, drawing fewer talented workers into the field.
Tamping down the level of innovation in the financial sector, of course, might not be an entirely bad thing. (Credit default swaps, anyone?) Furthermore, as financiers' wages became far higher than those of government regulators, it made it that much harder for the latter industry to attract top talent.
Accordingly, the authors note, "the flow of talented individuals into law and financial services might not be entirely desirable, because social returns might be higher in other occupations, even though private returns are not."
If all of this talent does start to flow out of the banking sector and into the rest of society, what other good could come of it?
(Hat tip: Free Exchange)
Your recitation of the two periods in which financial workers made absurd piles of money is the best argument that can be made for regulating those sectors and keeping the salaries in line with those of other professionals.
ResponderEliminarIt's crazy to have a society that provides its best financial rewards to people whose only contribution is to come up with new and different ways of gambling with other people's money. They produce nothing. And while there needs to be a sector that provides the financing for those who are producing things, in the past ten years or so it appears the high-flying bankers weren't even doing that.
"talented people are likely to leave finance in droves anyway, once tighter regulations set in"
ResponderEliminarThere's also the small matter of the financial sector going through a profound contraction, since there are far fewer interest-only and negative-amortization mortgages to be written. Finance grew to an absurd size during the credit bubble.
Excuse me, Mr. Freak O. Nomics, what are you saying?
ResponderEliminar"The authors conclude that regulations on banking [someone watching out for our interests] stifle [restrain] innovation [clever scams], which keeps down earnings and wages [wild looting of our assets], drawing fewer talented workers [fraud artists and con-men] into the field."
Did I go to bed and wake up stupid? Are we both speaking English? Just because you steal with a fountain pen and a contract instead of a gun or a knife doesn't make you a nice guy.
"The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread." Anatole France
How talented could these folks at the top echelon of the finance industry have been, given that, collectively, they led us into this disaster in the first place? How much are we losing -- really -- if they all leave?
ResponderEliminarLet them go to other countries and wreck their economies. Why should I care? Let a new crop of finance leaders -- who maybe won't have plunder on their minds since they will take charge while the compensation-cap is in place -- take the reins for a while.
Also, if we just dole out bonuses to these guys as if they never did anything wrong, do we not open the door to a massive moral hazard? Do we not reward incompetent management and thus incentivize future government bail-outs?
Is there no benefit to holding the line and saying, "Look, you guys have made enough money leading this country into ruin ... be happy with what you've plundered stolen grafted earned from the system already."
Good. The system was set up so that people who were good at /making themselves money/ floated to the top. This is not the same group as the group of people who are good at /making their shareholders money/. If you run your company into the ground, then ask taxpayers for a hand out, the taxpayers - as shareholders - get a say in how much your compensation is.
ResponderEliminarYou'll see no tears from me.
When are we going to realize that it wasn't the quantity of compensation that was the problem in finance? The application and incentives were the problem.
ResponderEliminarThe pay structure incented many in the world of finance to focus on the immediate term to drive their bonus. They weren't being paid for what the firm looked like in 5 years or 25 years, so that was a secondary concern to making this year's numbers.
The bosses of the financial firms got exactly what they incented their employees to do, escalating at an unsustainable pace until it all came tumbling down.
So, if the "talent" that brought this world-wide financial mess upon us exits the financial sector, the problem is....?
ResponderEliminarSo, in both cases (1920s and just prior to the current downturn), "talent" is defined as "talent at causing nationwide catastrophes." Yes, let's please start that exodus immediately.
ResponderEliminarHow talented are they? To be able to lose billions because of poor policies does not seem like a worthwile skill to me.
ResponderEliminarFirst of all, why do we assume that these are talented executives in the first place? Didn't they just oversee one of the biggest industry miscues in our history?
ResponderEliminarAssuming there are some talented folks out there leaving to other industries, in my mind that's a great thing. We need talented people in almost every other industry. US Manufacturing has lost its competitive edge with the rest of the world. Healthcare is one of the most inefficient industries out there.
And lastly, maybe some of these people will have a tinge of guilt as they realize that all the money they made over the last decade was at the expense of the country and the recession we now see ourselves in. Hopefully a few will turn to non-profits or start new companies that might actually give back to people.
These guys were incredibly brilliant and talented? Seriously?
ResponderEliminarBernie Madoff wasn't an investment genius, he was just running his operation at a time when the rich were getting richer and so massive money was flowing into Wall Street as investment instead of being spent by the working class as consumption.
I guess it takes a certain kind of genius to say "I'm going to bet the entire fortunes of my company on the proposition that in an era of declining median income and increasingly unqualified homebuyers taking out things like "liar's loans," these homebuyers will continue to make their mortgage payments more or less indefinitely. Oh, and I've also figured out a way to make this investment high return and risk-free."
The financial markets were the shining jewel of a kakistocracy. It's not like people weren't smart enough to see this thing was all smoke and mirrors, it's that as long as they kept up the charade, the bigger their bank accounts got.
I remember thinking about how society allocates our intellectual capital when (in the mid 1980's) I hired a very bright young person who was working on high tech projects to help automate building cars at GM, to work on doing analysis of mortgage prepayments.
ResponderEliminarAnecdotally:
ResponderEliminarBeing a somewhat recent graduate from a fancy New England private school, I can say that for many bright kids--finance was just the path. Smart, but didn't want to be a doctor? Finance. Driven, but not interested in politics? Finance. It was the default for smart kids, and the money was a HUGE draw. It seemed like everyone and their brother interviewed at Goldman Sachs.
It'd be nice to get those smart kids into other sectors. I bet Teach for America applications will be up this year as new grads look at dismal job markets!
"The authors conclude that regulations on banking stifle innovation, which keeps down earnings and wages, drawing fewer talented workers into the field. "
ResponderEliminarExecutives should definitely be paid more if they improve their company's earnings, but Innovation and earnings are not the same. The financial innovations of the 2000's mainly consisted of derivatives, securitized assets, credit swaps, and other arcane instruments. These created *imaginary* earnings, for which the innovators were paid *real* wages.
So... you're saying that the morons that got their companies into this mess will leave if we cap executive pay? Why didn't we do this from the start instead of giving them a ton of no-strings cash in the form of a bailout?
ResponderEliminarI know, I know. A pay cap is a terrible disincentive to the looters, get rich quick schemers, those with an over large sense of entitlement, and the white collar criminals. Maybe those poor companies will be stuck with some responsible, level-headed people to run things on a measly salary of 10 times the average household income in this country. It's a tragedy I'm not sure those companies could survive with.
What other good could come of the deflation of the financial industry is that industries that produce actual goods and services--such as hi-tech and education--will have more access to cheaper human capital.
ResponderEliminarThis is a good thing.
Maybe all of these "bright young" narcissists will start agitating for equal pay and equal rights for all!
ResponderEliminarOr maybe once they realize that they cannot legally rob people they will just go directly into criminal enterprises.
Whatever happened to an honest day's pay for an honest day's work?
We need to start understanding that the "market" no longer provides a moral justification for self-centered destructive behavior or else we risk having the tides of unrest washing over the rest of the world land at our shores as well.
The concept of a "market" is a tool. Nothing more. Saying that the "market" will solve things is nothing more than saying that "math" will solve things. Yes. We may need to use it to find a solution, but it is not an end in itself.
So is it a bad thing if the smartest people in the financial industry go into other lines of work?
ResponderEliminarI was going to suggest healthcare as an alternative, but I'm not so sure it's a good thing to flood the healthcare industry with "talented" people whose main incentive is money.
ResponderEliminarOn the other hand, paying more for good researchers might be a good investment.
Are we really worried about "losing" this "talent"? These people gambled away an entire generation's 401k and savings. If I lost my company and others billions of dollars, I wouldn't be asked to stay. I wouldn't even get a letter of reference.
ResponderEliminarGood riddance, let the college new hires in. It can't be any worse.
So we should be concerned that the "talent" responsible for driviing the economy into a ditch will leave the financial sector? Hell we should be dragging them of to prison with their hands behind their backs and their pants down aroound their ankles.
ResponderEliminarLike others here, I have to question how talented these people are, given the condition of their industry. Since you study these things I am curious - is there any empirical evidence that a CEO with an Ivy Legue MBA is any better at running a company than a CEO with a Bachelors from Podunk State?
ResponderEliminarStill, I am extremely uncomfortable with the idea of the government setting pay caps on anyone, though I suppose they (we?) have the right to attach that string to any financial assistance. I would rather have seen legislation that created a federal income tax rate of 100% on all income (real, imputed, unearned, otherwise tax-exempt) above $500K for ANY person who was an employee when government funds were received, regardless of where they subsequently work, until every penney of that money has been repaid. Let's punish the culprits, not the people who come in to fix the mess.
Judging by their performance, there is very little talent in the sector to begin with. And the upper echelons certainly possess none. With the lack of any correlation between performance and compensation, talent or intelligence were never required for success.
ResponderEliminarGetting rid of the greed at the top of the pyramid is probably the best thing that could happen to the industry.
What talent?
ResponderEliminarPay them a lot to screw thing up further? To make further risky investments?
Why are credit default swaps supposedly so complicated. They are the equivalent of PMI for bond payments. You pay PMI in case you default on your mortgage payment. You buy a credit default swap in case your debtor fails to pay the bond.
ResponderEliminarAm I missing something? Sure, the pricing may be a bit more complicated, but the principle isn't that hard.
Hmmm. Interesting. Innovative leaders of banks probably are looking for innovative ways to screw over borrowers. Would it be so horrible if bank execs made teachers' salaries, and the only reason people went into that business was pure altruism?
ResponderEliminarIt seems to me that if you put caps on salaries, then you will not attract altruists, but rather you will only get execs who enter the arena with plans of gaming the system and sucking money out through avenues other than salary.
I'm no fan of Obama, but I do like the cap as he presented it. You are only subject to the cap if you take the money. It's like the original welfare system where if you applied, they took a look at your standard of living. You have a radio? Sell that to get by, and come back with your hand out only after you have exhausted all other options to stay afloat.
If those people who ran this economy into the ground are talented, then I'm afraid of what you'll call the people who do honest work and are motivated to do the "right thing" instead of being motivated by the money.
ResponderEliminarYou fail to mention that the restrictions on executive pay are hardly restrictive. Salaries for a very few executives are capped at $500,000; however, there is NO restriction on stock options or other perks for these individuals. As far as I've read, there's also no restrictions on expense accounts for those under a salary cap.
ResponderEliminarSo while an exec might be making $500k, he can have a $1.2 million expense account, get his mortgage paid by his company, have private school for his children paid by the company (in the name of "security"), and get enough stock options to roughly equal his previous salary.
I would gladly accept such "restrictions" on my salary!
How bout we invest (raise income) for those who actually produce human capital, aka teachers. Pre-K to high school to be exact.
ResponderEliminarAre they really going to leave? Where will they go? All of the world's financial companies are laying people off. What could they say in a job interview. Tell me what you did in your last job. "Well I lost the company I worked for $40Billion dollars." Who would hire them?
ResponderEliminarBut hey, keep them around so they won't "go" somewhere else....
Perhaps, these so-called "talented" folks are just a reflection of the social norm in USA -- get rich quick by doing whatever you can get away with while not getting caught. And if got caught, call your buddies in the congress/white house/regulatory agencies who owe you one (either directly or indirectly thru campaign donation, connection, etc.) to bail you out or change the regulatory rules on your behalf.
ResponderEliminarBANKERS ARE ALL EVIL, GREEDY AND STUPID!!!
ResponderEliminarReally?
It is surprising that more people don't realize that it was a very small subset of people in the finance sector that contributed to the mess we are in now. The rest, who were not "gambling with", "looting" or "plundering" anyone's money, are still going to suffer from drastically reduced renumeration despite having done nothing wrong. In fact they probably did their job very well and are very smart people. No one seems to care about this, though. It's more fun to paint the entire lot with the same brush, right?
Do you blame assembly line workers or showroom salesmen for the failure of GM? No? Then it is time to clue in to the fact that the finance industry is full of very talented people who were victims of the actions of a tiny fraction of their coworkers.
Of course there will be an exodus! Wall Street was once a place where you would get rewarded...no matter what you did as far as performance. Take on excess risk - putting the future of the company at risk? No problem, here's your million dollar bonus...and office.
ResponderEliminarSo much of the problem with Executive Pay is linked to absent and/or institution shareholders, so I doubt there is much that the Whitehouse can do, but limit what is done with the money that comes from taxpayers and I think that is fair.
Here's a great article about a very smart bank, doing really smart and inventive things...with a CEO who is paid under $500K.
Big Lessons in Finance from a Little Bank you Never Heard of....
washingtonpost.com/wp-dyn/content/article/2009/02/10/AR2009021003583.html?wpisrc=newsletter
Just because the ceos of these companies circulate in the rarified country club air that refracts high salaries doesn't mean that they are actually good at what they do. I mean they should be judged on return on shareholders investments which includes company expenses. Sure money begrets money but it the type of money that it attracts the type the company really wants or needs?
ResponderEliminaroh, and also, there doesn't seem to be any restrictions on what the companies that take taxpayer money can do with the executive salaries AFTER they pay back the taxayers...so they can promise their ridiculous bonuses after the executives right the ship and pay off their debt....wow, delayed gratification. i'm sure that's a new thing to most of Wall Street.
ResponderEliminarPray tell - what talent do these people have? As far as I can tell their only real talent is enriching themselves at the expense of everyone else- in biology you call such organisms parasites and I dare say nobody will miss the head louse, tick, or ringworm if they went extinct.
ResponderEliminarSnark aside, is there any reasonable way to assess the talent that may or may not be leaving the industry? My private suspicion, similar to most of the commenters', is that most of these companies could do just as well by replacing their CEOs with bright, newly-minted MBAs at $250,000 per annum... but I am a know-nothing grad student. It's easy for people like me to say "Obviously bankers are all morons, replace them with chimps" -- but if the pay cap is really going to leave us with sub-competent people running the very industry that most needs good management right now, it's a problem. We shouldn't be too quick to buy that story, but we shouldn't dismiss it without evidence either.
ResponderEliminar"The authors conclude that regulations on banking stifle innovation..."
ResponderEliminarThat's not necessarily a bad thing in my mind. I don't think depository banks need a whole lot of innovation. They need to be conservative and boring with my money. Just risky enough to try to keep up with inflation, that's what I ask for. Too much "innovation" is what got the banks into the mess they're in now.
Innovation is really best kept to the productive parts of the economy... where products are made, rather than the financial parts. "Innovative" financial instruments are nice, but need to be controlled, lest they blow up like CDSs and the like. When I want more innovation, I'll invest in risky assets like stocks and bonds.
Let Main St. companies innovate. Let the Wall St. banks finance to them.
Yes, I echo Dennis. "What talent?" I deny that any talent exists, and furthermore suggest that someone with a journalistic shred of integrity sign their name to this article.
ResponderEliminarWhich companies have demonstrated any, any at all, preponderance of "talent" in the financial industry? How would we tell? By the fact that they aren't going to the government for handouts?
The rising tide lifts all boats. In the run up to the current downturn, there was no talent required to take home millions of dollars. There was only greed, and we should never fear that the greed will leave an industry.
So while we still get people trying to get into to this country to do menial farm and sweatshop work (or has that decreased in the recession with more locals wanting to work in the fields?), we will only have to fill one or two containers with these professionals and export that to China?
ResponderEliminar1. Who could possibly replace these guys? Uh, how about anyone at the company that does day-to-day work and aspires to be the boss? They are qualified.
ResponderEliminar2. What industry will the bankers screw up next? Who would want to hire a CEO or higer up from a bankrupt company anyways? McDonalds? Hardly, they'd have to pass a drug test.
#1 says it all. "Let's regulate them to death!" I'm sure that will show them. In the end, the free market is doing what it should and that is punish those that caused the mess. How many hundreds of thousands have been laid off from the financial sector? The depressing of wages in this area will be affected for years to come. Like another author pointed out, the talent will finally start going to other places and we'll be better off for it. Regulate? I think not.
ResponderEliminarI think that the "true talent"-- those with enough self worth to only work on what they believe benefits society-- left the finance industry long ago. We desperately seek leadership, as it is difficult to find meaningful employment in this country.
ResponderEliminarShould we work in the medical field where insurance companies make sure we provide poor service? Should we be engineers and invent things when corporate "leadership" chooses to shelve the most technically adventurous projects in favor of more "marketing"? It seems like the only way to do well by doing good may be to work for Google, and many of us are not programmers..
If the banks want to pay their executives more money, they are welcome not to accept any bailout money. Sounds like a nice incentive program for executives of bailed-out companies: pay the money back and then we can pay you a top-tier salary. That sounds like a nice plan for attracting future top talent to me.
ResponderEliminarPerhaps the old current-generation execs won't go for that, but like some people commented above, those are the folks who got us into this mess in the first place. Time to bring in a different kind of talent.
This is kind of like how you can't afford to buy a million-dollar-home when you make $20,000 a year. Remember how much trouble that caused us. The new conventional wisdom ought to be: If you need government bailout money to continue operating, then you can't afford to pay your executives multi-million dollar salaries.
"Pray tell - what talent do these people have? "
ResponderEliminarWhat about the government's complicity in this disaster? Why is it that the bankers (some of them scoundrels, for sure) get to be the scapegoats while the government gets to take the high road?
ResponderEliminarWhat about the investors and those who took out the loans? Should one not invest in what they know? If you don't understand what you're investing in, don't give them your money. Nobody asks questions when their house is going up in value 20%/yr or when the stock market it soaring. But as soon as it crashes we have our hands out and cast blame on everyone else. The people who should really be ticked are the ones who were responsible, educated, saved and weren't greedy- now they get to have their money and future taken by the gov't and redistributed to the irresponsible.
If the banks were allowed to fail or go bankrupt the bad CEO's would lose their jobs. Those who took out risky loans because they saw only the upside would learn from their mistake and move on. Those who were responsible would continue be prosperous and might actually invest in something with lasting impact.
These so-called "talented people" are barely intelligent enough to serve at Macdonalds. The sooner they're gone, the better.
ResponderEliminarWe've averaging one comment per page that agrees with the article.
ResponderEliminarBONA -
ResponderEliminarSo clarify for me what actual skills are involved in "getting high returns" - do they understand the complex math involved in derivates or macroeconomic models? do they have an intimate understanding of the businesses whose stocks they trade? I suspect not. Sitting at a trading desk all day buying and selling companies you know nothing about or pushing subprime to make the balance sheets look better next quarter is not "high skill". The collapse we see is not indicative of bankers knowing anything but how to stuff their own pockets and the board of directors of their own company - if an archetect designed a building, and was paid billions to do it and if fell down three years later - I would not consider him "skilled" at anything except fleecing his investors. Sorry I work with engineers, scientists and doctors every day, these people know how to do things - they have skill such as knowlege of math, programming, hardware and surgical skills, and they are all compensated far less than our ruling class - who has the magic skill of generating "high returns"- except when they don't, and then they need a bailout.
What innovation? Ranieri came up with securitization of mortgages in the early 80s. The only other piece of innovation was calling insurance on those securitized mortgages "credit default swaps" and getting a gullible and/or paid off Congress to forbid regulating it as insurance.
ResponderEliminarOr maybe you are considering the Madoff/Stanford update on Ponzi schemes as innovation. After all instead of promising extremely high returns that they then paid with new investor's cash (for a while), they promised slightly high, but extremely safe returns that they then paid with new investor's cash (for a while).
Why is finance the only industry where "innovation" means that eventually I get screwed?
ResponderEliminarI've read a lot of bashing of these financial 'top dogs' in the comments. They aren't all greedy dumb losers that drove their company into the ground. Even if you ran your bank smart but all of a sudden no other bank would loan to you, then the current system breaks.
ResponderEliminarI don't believe any position should have a cap. Shouldn't more of the blame be on the people that hired these dogs at these salaries. If the Red Sox spend way too much money on one player and he doesn't do well enough to help the team, who is to blame?
If you believe that someone is good enough that you are willing to give them an incentive even if they get fired to get them to work for you, I don't have a problem with that. I do have a problem when that person gets bail-out money or the company goes under.
By the way, let's not forget that these supposed "pay caps" only apply to banks receiving "extraordinary assistance". In essence, that probably means only Citi and Bank of America.
ResponderEliminarSo if the caps apply to only two companies, and only the top executives at each company (let's generously assume that means 10 people each), we're talking about wage restrictions on 20 individuals.
And again, that's ONLY for salary. My heart bleeds for them.
Comparative advantage should give us hope.
ResponderEliminarFor decades now graduates have swarmed into banking and finance, because it was "the best place for me". Some of these people were terrible bankers and financiers, looking for short-term gain at the expense of long-term prosperity.
But now comes the correction. Leaving banking, they'll have to learn or apply skills in new areas. To our collective surprise, they may actually be good at other things. Let the good bankers remain bankers - and hope the bad ones find valuable work they're good at.
The question I wish they had asked is "Where can I add the most value to our country (or world)?"
If even a few ex-financiers find their way to productive work they do well, I'm all for the change.
"To the rest of society" is an overly-generous estimate of where that talent will go. Most of them will probably get job offers overseas where they don't have ridiculous price ceilings on salaries.
ResponderEliminarJust like in a commodities market, this will have an effect of increasing movement of production (in this case, the talent) to international markets and out of domestic markets. Yay for hurting our average quality of goods!
"Should we be engineers and invent things when corporate
ResponderEliminarDr. Manak
ResponderEliminarI agree that engineers, scientist, and doctors are all very skilled and talented people. However, the talent needed for "Sitting at a trading desk all day buying and selling companies you know nothing about or pushing subprime to make the balance sheets look better next quarter
So talented must mean: smart, focused on personal income and short-term gains, with questionable ethics and judgement.
ResponderEliminarAs Danielle #20 indicates, maybe we should be worried about where these "talented" individuals will invade now that they can't make millions in banking, instead of being excited about it.
"If they really have no talent then why did they get to the top and others did not, there had to be something that set them apart."
ResponderEliminarlet me guess - family connections which leads to the ivy leage school acceptance, which leads to a job at an investment bank - who knows with the right family connections you could even go to Yale and be the next president... Studies have shown there is less social mobility in the US than in Europe - so much for our meritocracy....
Perhaps it would be best for everyone if we threw a few billion at the financial industry to keep these talented people in finance.
ResponderEliminarAfter all, we don't want these 'geniuses' screwing up any other industries. ;)
Frankly, I would love to see an exodus from the financial sectors.
ResponderEliminarIt was always a bit sad seeing upperclassmen flocking to banking at the end of every school year. Better to have some of these great young minds put to use more effectively.
Maybe a "talent" exodus is *just* what that sorry excuse for an industry needs. I couldn't keep a straight face while typing "talent" in reference to those bankers. Sorry, but running a bank is the one of the easiest jobs in the world, if you run it the way a *bank* is supposed to be run: accept deposits, lend the portion of your deposits out at higher interest rates than you pay to depositors to companies and individuals with a strong ability to repay, rinse and repeat. How hard is that? Every child in grade school is taught this. Running a bank only becomes "hard work" deserving of a super big paycheck when you are trying out "financial products" (like what, Nabisco makes "food products"?) that more closely resember betting systems for roullette than the process described above.
ResponderEliminarI think maybe those bankers should be flipping burgers, and we need to pay some 19 year olf kid $200,000 per year to simply take deposits and make sensible mortgages and business loans, just like what a "bank" is supposed to do.
For every big bank failing right now, there is a small community bank or credit union that is thriving. Gee, I wonder why?
J.Ja
Gary Becker comes very close to figuring it out, only to stumble and fall back into the same preconception as Freakonomics, that executives must somehow be "best and brightest" despite the overwhelming real world evidence of their abysmal job performance (as nearly every commenter here notes).
ResponderEliminarBecker almost nails it when he notes that Boards of Directors "are either too ignorant of how the companies they oversee are really doing to overrule top management, or they are too close to management to make the hard decision to fire them when they perform badly."
Rather than trying to directly regulate executive compensation, the decision-making authority to set appropriate executive compensation levels should be forced out of the hands of a few corporate executives' cronies and enablers and into more direct control of the shareholders whose interests are being compromised.
So we're going to have the people with the ethics of bankers etc work as our doctors, teachers, journalists .... Looking forward to that!
ResponderEliminarIf shareholders (including the large mutual funds -- notably Vanguard, Fidelity, Capital Group -- who have largely not exercised any of their power) of public companies were to take meaningful steps in structuring compensation that makes sense, we wouldn't need these government caps. Now that we the people are shareholders, shouldn't we use this opportunity to force real change in this area?
ResponderEliminarThe current system of cronies on reciprocal boards, compensation consultants and the desire for all to be 'above average' has resulted in sickeningly excessive pay. Combine this with tax laws that have enabled unparalleled wealth to be accumulated and we have produced a country that is more and more classist. The 'haves' also now seem to think that they are entitled to work outside the normal rules that apply to everyone else.
I hope that the pain we are feeling now will help us to restore some balance to our society.
Has anybody explored the idea of extending these salary caps to executives of companies that stand to benefit from the stimulus package? Since some companies will benefit disproportionately (due to, among other things, "buy american" provisions in the bill), should their executives also benefit from this artificial demand boost?
ResponderEliminarI think asymetric information, personal connections, and just the way the world works may come in to play at the margin where an employee is being compensated in an amount over $500,000. Surely, basic models can be relied on to tell us that a more productive and intelligent worker will make more than a less skilled one, on average. Once you start to get to the top of the corporate ladder though, politics, pedigree, charisma, etc., connections on the board of directors all combine to make it so that the people at the head of the company are not necessarily any better than the 4th, 5th, or 6th person at the company, who may very well be making around $500,000 or less.
ResponderEliminar@6
ResponderEliminarThe best incentive I can think of for long-term company growth is retirement pensions. Of course, most companies have been getting rid of those.
The level of anger and frustration here is high.
ResponderEliminarAs some people pointed out, the risky deals that have caused some widespread damage were driven by a small percentage of financial workers. Not everyone in finance sat "at a trading desk all day buying and selling companies you know nothing about or pushing subprime to make the balance sheets look better next quarter"
Most of them were moving money from firms with lots of cash (like an insurance company) to companies that wanted money (like a small business). Blaming these people for the crisis is like blaming a car salesman for GM's problems.
So go ahead and make your jokes about the "talent" and wondering what industry they'll sink next.
But as "talentless" as these people are, it's amazing how much America struggles when they are unable to extend credit and do their job (because of the errors of the few).