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A different view on bonuses and CEO compensation

Published on January 20, 2010 by: in: Economy

It’s all the rage these days to decry evil corporations and their greedy executives. Most recently, there is a huge brouhaha about money paid out in bonuses to 70 some executives at AIG, a much bailed out, large insurance company. With politicians and the media climbing over each other to show how outraged they are, I felt that I just had to say a couple of things you are not hearing in the media. I want to encourage people to include more thinking and facts in amongst all their emotional excitement.
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Many of these companies made big mistakes. In general, you only get to be a top executive at a large corporation because you are very competent. And generally, the very most competent of these end up at the top of the very largest corporations. If that general concept doesn’t make sense to you, you probably shouldn’t read further.
So now you have these extremely competent people making big mistakes. Generally, when large numbers of people make the same big mistake, there is something big distorting the information upon which their decisions are based. That was true in this case and has everything to do with actions taken in Washington over many years under both parties, but that is not the subject of this missive (but it was of one a sent out a few months back).
So, as a society, we are now deciding that executives at these troubled corporations should get paid less. Do people really think that central authorities in Washington should be setting anyone’s pay rate? This approach to economics has been fairly thoroughly explored in many countries with consistently disastrous results.
But we are ignoring the lessons of history. In many cases, congress is now legally capping pay at $500,000 for people who were making many millions. Do you really believe this will result in more competent managers at these companies?
It should be rather obvious that those that are able to, will jump to other jobs where they get paid the market rate. What would you do if your pay was cut by 80%? Might you look for another job? I think it’s safe to say that anyone who has the option to move to another company will do so. That means the only ones left will be those that could not find good options elsewhere. Would you expect these to be the best of the lot? So now we’ve taken companies in trouble and are severely degrading their management capacity. Will this make for a stronger company/economy?
Now to the bonuses. Let’s say you work at an auto dealer and it’s your job to find salespeople who sell cars. You have a contract that says you get paid so much, but that if you reach certain performance goals, you get a bonus. Now let’s say you reach those goals. But, let’s say the company treasurer put all the company’s cash into a scheme hoping to beef up profits. Let’s say he was wrong and lost all the company’s cash and the company is in trouble. Does this mean the company is no longer required to pay your bonus? Maybe the company can’t afford to meet its obligations. We have a whole set of procedures set up to handle just such a circumstance. It’s called bankruptcy. Short of that, the company has a legal and moral obligation to pay you your bonus.
AIG paid those bonuses. AIG has not been allowed to go bankrupt. It was legally required to pay those bonuses and had they not done so, would have been sued and have to pay them as well as the lawyers who fought a losing case. If you were one of the executives who’d busted his/her ass to meet the performance objectives, I imagine you’d expect to be paid.
Now that congress, the press and the public –in my view, the proverbial mob, is up in arms about this, emotions and hyperbole rule the day. The facts and the law are increasingly irrelevant. Our senators are ready to rescue us from this abomination.
Will they take responsibility for all the ways they distorted the economy over the years? Not likely. It makes much more sense to find a scapegoat. So much the better if the scapegoat is already unpopular.
One Republican suggests these executives should commit suicide. Several Democrats have promised to pass a law that retroactively creates a tax on these bonuses. Does anyone else feel a bit uncomfortable with retroactive laws? What if your town made it a felony to leave more than 8 lights on in an unoccupied home –and made the law retroactive in order to go after one or a few citizens. In other words, what if the target of the mob thinking was you or someone close to you?
Gosh, does this remind you of anything in history?
Let’s see, a bold new political force comes to power after years of frustration with a previous regime. The new group effectively harnesses general fear, jealousy, suspicion and frustration in the society, and intentionally amplifies negatively feelings to a subgroup with wealth. Soon nearly everyone agrees that just about everything that is bad comes from this subgroup. Soon emotions run high enough that there is no obstacle to the government incrementally taking away the property and rights of the target group. The government uses what is seized to increase its control over the nation, bringing more and more spheres (things like finance, the arts, health) under its control. Do those in power do this for their own benefit? Well, that tends to happen, but most of the leaders believe they are doing it to create a stronger and greater nation.
Ringing any bells?

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About David Hollies

is a writer, lecturer and economist. His home outside Washington, DC is a meeting place for fans of freedom from all over the world.

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