Relative to the bailout money received, it certainly should have a say. As stated on one of the non-linkable comments:
"A loan is a contractual agreement. Banks attach conditions to loans all the time...and, usually, the riskier the loan the tougher the conditions. The same holds true here. If a failing corporation accepts a loan from the government, it must also accept its terms. Ms. Fiorina, don't forget capitalism can't exist without the freedom to contract...the same freedom that allows people and corporations in America to "decide what each job is worth."
I think it's disgusting that bank executives have been giving themselves outrageous salaries and bonuses while running their companies and the national economy into the ground. I'm angry that tax payers have had to bail them out and they continue to collect outrageous salaries. I absolutely believe their pay should be cut. In fact, I wouldn't even mind a little mob justice.
That said, I think I'm bothered more about a government capping the salaries of those charged with using our money to turn things around. We need the best minds working on a solution and I can't help but feel like we're shooting ourselves in the foot when we've handed over all our money and then severely limited recruiting potential.
Who will want to step up and try to right the sinking ships for comparatively low pay when there are opportunities at companies not subject to a government imposed salary cap?
You can't hire the best candidates when you pay the least, and on top of it all can only provide a hostile environment.
Nothing is saying they cant give them 1 billion in stock, the point is they can't suck money out of the company until the government get's their money back. The government has a long and successful track record of turning companies around that have say mob connections where people cooking the books. In some way this is basically the same thing. Companies payed high dividends and passed out bonuses and stock options like candy while ignoring the risks they where taking.
Some of these company's would have been fine if they had not increased the dividend they had payed from what they where paying out 5 years ago. Every time they sent a dividend / bonus out the door they where hiding just a little more of their profit from the type of risks they where taking. So, if the company is run into the ground again the CEO will get 500k/year, but if they pay back the government their is nothing preventing that CEO from walking away with 100 million / year which seems reasonable.
Well certainly they can attach conditions, and the government has. A bank should not, however, attach conditions which almost certainly detract from the client's ability to pay back the loan. It's bad business, something the government seems to be quite good at.
By limiting CEO pay to companies that are heavily invested in by the government, you assure that some bright, competent CEO will never take over your company except for the sheer, masochistic joy of bringing a dead company back to life. Instead, you will be stuck with the incompetents who got you into the situation in the first place and are just happy to keep their jobs, multi-million/billion dollar pay cut or not.
Instead, you will be stuck with the incompetents who got you into the situation in the first place and are just happy to keep their jobs, multi-million/billion dollar pay cut or not.
Or clearly superior talent like John Thain, et al.
Do you seriously mean to imply that there are no individuals out there making less than 500k per annum who could not pull off a deleveraging and conservative restructuring of a business? No one?
Who are these individuals who will work for no less than several million per annum who have pulled off such miracles that no mere person earning less than half a million per year at the moment clearly outclass?
Certainly they have not been at the helm of any financial institution I am aware of. Hell, I nominate mynameishere for one of the positions, as he seems to have a clearer grasp than most of the idiots at the helm last go-round:
Deleveraging and conservative restructuring may work for a commercial bank, but not the hybrid commercial and investment banks that we're talking about here. These companies are involved in many diverse business lines and, bungling in the mortgage-backed business aside, many of these businesses are hugely profitable. This is why institutions like Goldman Sachs and Morgan Stanley were able to report large losses instead of collapsing: mortgage losses have been mostly offset by gains in other businesses. A CEO will need to continue to invest in the profitable business lines, with an eye on risk, to avoid being shut out of them by aggressive competitors, leaving the bank with nothing but toxic assets and low margin operations.
In "How to Make Wealth" pg wrote about how salesmen are an exception to compensation rules because their performance can easily be measured. The same is true for traders who do not deal in positions that must be held for a long time the way mortgage bonds are. If a trader makes $30 million in this way, he is in a position to demand, say, $5 million to $10 million or he will be happy to join a different firm that will pay him that amount. Thus, the reduction of compensation at the top levels cannot trickle down to the lower levels without destroying the firm by causing its top performers to leave.
Traders are actually one of the hardest professions to measure. They are risking other peoples money so for example making 50% in an up market at the risk of drooping to 0% in a down one are easy with leverage. It's the choice of when and how much to leverage that takes skill. And this skill is only demonstrated as markets move. This past mess was built from people making a bet with high odds and low payoff with a lot of other peoples money and skimming the fat of the top. Basically, no earthquake today you get 50k until the day when there was an earthquake and they are down 100 billion.
PS: One of the secrets to creating mutual funds is to make 100 of the things with a few million on hand and take lot's of risks. Over time some will preform better, you use their past performance to gather more money and you end up with a small number that have a lot of money and have made the early movers lot's of money but have not necessarily generated a lot of profits for the late adopters. It's like a legal pyramid scheme, but when it stops working they can move you to the next fund with a great track record, and the next, ...
Deleveraging and conservative restructuring may work for a commercial bank, but not the hybrid commercial and investment banks that we're talking about here.
AFAIK, Morgan and Goldman are now commercial banks and restructured to this form to stay alive.
These companies are involved in many diverse business lines and, bungling in the mortgage-backed business aside, many of these businesses are hugely profitable.
Is this legal since they are now commercial banks? Do you have any citations on these hugely profitable non-core businesses? At any rate, gains from trading desks will be seriously diminished by holding/leverage requirements.
If a trader makes $30 million in this way, he is in a position to demand, say, $5 million to $10 million or he will be happy to join a different firm that will pay him that amount.
Do you have any stats on any member of the trading desks of these firms doing these types of numbers? Further, is it reasonable to assume these traders can continue to be as productive in this leveraging/financial climate? Is the current market for that talent still as strong?
I don't know. Steve has excellent empathic design acumen and taste, but do you think thats whats required to stop making dumb loans and restructure and write off bad debt?
Not saying he couldn't do it, but the skill sets seem orthogonal.
The crux of my argument is the refutation that you need someone of that caliber to do what appears to be pragmatic banking and risk management.
I was just using him as a case of someone who could obviously set his own salary working for a whole lot of places and decides to be compensated in other ways (stock, notably). He also went back at the brink of collapse and reanimated the company, so in that aspect it's similar.
Actually by limiting pay you will get people who are only interested in bringing a dead company back to life as opposed to people with other motives such as grabbing as much wealth for themselves before the bubble bursts.
That's true, and that's a big weakness in my argument. However, if the hypothetical "best guy" can't bring himself to turn down 50 million at a competing (and probably quite close to death) firm, then the firm that needs him most should be able to pay him. There is no reason for arbitrary limits, especially when they incentivize the people most capable of saving your firm to join your competitors.
A bank should not, however, attach conditions which almost certainly detract from the client's ability to pay back the loan.
Banks do this all the time, they call it "interest".
The government is trying to make sure that the money is used wisely, much like banks want me to spend my loan on a house rather than hookers and blow. their money, their decision what conditions to attach to best meet their goals, which may not just be financial.
Government also shouldn't give free money to failed businesses. We should either properly socialize the businesses by exchanging money for voting shares, or let capitalism work.
Better question, why are taxpayers willing to foot the bill in hundreds of billions in toxic assets for the right determine executive pay and bonuses?
Considering almost all Post-TARP financial institution are worth less than the amount of TARP accepted, if taxpayers are in a punishing mood they should just let them go bankrupt.
Now that these companies are no longer "too big to fail", that in my opinion is a viable option.
She didn't say that. She said the reverse:
"Ultimately, it is the owners of a company who must determine whether a CEO's rewards are justified by a CEO's performance. And because the American taxpayer is now a partial owner in many companies, the government can get a vote as well -- in some cases a very sizeable vote."
I actually agree with her but IN REVERSE:
Ultimately, it is the owners of a company who must determine whether a CEO's rewards are justified by a CEO's performance.
It is up to sharegholders to decide if a CEOs performance justifies pay, AND TO HOLD CEOs ACCOUNTABLE or shareholders should LOSE EVERYTHING.
That's what's missing here. Shareholders deserve to be wiped out, for failing to provide the required oversight of their own investmanets.
Wiping out shareholders provides the last line of defence (self responsibility) for a system that is rapidly failing at all level.
That's going to take a change to the way the whole mutual fund system works. People that buy into mutual funds (typically because it is their only choice in their work 401k's) don't vote. Fund managers do. There is a whole good 'ol boys network between fund managers and corporation managers that has perverse incentive written all over it.
I work for an HP spin-off and am told all the time about the terrible job she did as CEO. That being said, this article is very well written and makes a lot of sense.
The reforms she is advocating are far reaching and would affect more companies than just the banks. They would create much needed incentives to look beyond just the next quarter. I think encouraging long term vision would be good for the country.
It's a tough one. On the one hand it's easy to get bitter about these bonuses. On the other hand the banks will lose people who (despite the mistakes they've made) are the most experienced in their fields when it comes to handling the banks and won't be able to attract staff of any quality without the bonuses as it's a systemic issue.
On the other hand as other smart people on this site have pointed out, where the government has lended or invested it should have a say in the decision.
Personally I'd be happy to let them have their bonuses providing their balls were strapped to a device that checks the stock price every 30 seconds and administers electric shocks when the share price drops below a certain level. If they manage to make it through the year without singed balls or resigning from the pain, I think they might deserve the bonus.
Where are these talented people going to go? If there are still banks around that are able to pay them what they want (without taking bailout money), why is there a need for the bailouts at all?
Who is this talent? Name them. What have they done/are doing that their leaving any of these companies will cause a greater apocalypse? What crucial functions do they serve that make them irreplaceable?
Lets say you have a hospital. The guys that run the hospital pay themselves large bonuses, because all hospitals pay large bonuses at the board. The board screws up (as in people start dying), and you tell them that they won't get any more bonuses. Soon members of the board leave and find other jobs, because all other hospitals pay such bonuses at this level. Then you find that you can't get people from other hospitals to replace them, because you don't get bonuses.
This is a crappy analogy to what we're looking at. It's not just the bankers at the top getting the bonuses, it's the traders, the front and back office, legal, every bit of the business that brings in money (or not as the case may be). It's a systemic problem requiring a systemic solution.
The answer is to align the interests of executives and the board members who determine their compensation with those of the shareholders. They've become progressively more out of whack over the last 20 or so years, and that's why we are where we are today.
If CEOs of financial corporations had been paid largely in stock with a 10 year vesting period, they wouldn't have taken the exorbitant risks that led to this bailout.
I would love to see some sort of executive pay regulation. I don't think that pay should be limited, but rather execs and traders held accountable for losses (vesting??).
If you keep 10% of winnings and are fired (with no personal loss) upon losing, the Martingale sure looks like a good strategy. That's a problem.
as long as people are self-serving and short-sighted, they will always try to get ahead of other people unless regulated. people can't help trying to do better than their peers, regardless of where the bar is set. i'm optimistic that over time we're headed towards a fundamentally different culture that teaches self-enlightenment and the big picture. i see these regulations as part of the wake up call inspiring a cultural revolution. (i know, there have been many before, but we're making progress and doing our best)
how is she even relevant, she kissed her career goodbye when she ruined hp. the government isn't doing this b/c it wants to, it's doing this b/c it has to.
"A loan is a contractual agreement. Banks attach conditions to loans all the time...and, usually, the riskier the loan the tougher the conditions. The same holds true here. If a failing corporation accepts a loan from the government, it must also accept its terms. Ms. Fiorina, don't forget capitalism can't exist without the freedom to contract...the same freedom that allows people and corporations in America to "decide what each job is worth."
Good comment!