Friday, February 06, 2009

Obama Salary Caps

Not only is our Democratic Congress working to deepen and lengthen this global economic downturn by igniting a set of international trade wars, our President is acting to make sure that hundreds of billions of dollars of bailout money is left in the hands of least competent business leaders.

Let me tell you a tale of two football teams.

Both of these teams had abysmal seasons. Each team won only two games all season.

The managers of these teams decide to each adopt a different strategy.

The manager of Team1 fires the head coach and goes out looking for a new head coach. In looking for that coach he agrees to pay any promising candidates what they are worth to the franchise. The better they are, the more he is willing to pay them.

The manager of Team2 tells his head coach the he can keep his job. He then announces a salary cap for the head coach position that is so far below the industry average that he guarantees that any good head coach will have better offers elsewhere and would have no interest in taking over the position.

Now, I want you to place bets as to how these teams will do in the next season.

Ultimately, we are not concerned with the fate of two imaginary football teams. We are talking about the best way to manage America out of its worst economic downturn since the 1930s. We are looking at two potential futures for the American economy – the future of Team1, versus the future of Team2.

Where Team2 seems to be the direction Obama is leading us.

A couple of days ago, President Obama announced that there will be salary caps on the executive positions of companies that receive federal bailout money. This virtually guarantees that the money will be placed in the hands of managers who are not the most gifted business leaders on the planet.

Those business leaders will have better offers elsewhere, and will likely take those offers.

There is a chance, however small, that some underappreciated business genius may get into one of these positions and show what he is made of. Yet, even here, the instant that he has proven his worth and what he can do for a business, we can expect the job offers to start coming in, and it will not be long until he decides to accept one of those offers, leaving his former position open to the next (probably incompetent) person in line.

I agree that business leaders have been overcompensated recently. The fact that a business leader gets paid $30 million does not imply that he is actually worth $30 million. In fact, many of our current highly paid executives have proved their incompetence.

It may be (and probably is the case) that we can get competent business leaders for significantly less than what companies are currently paying.

Yet, this does not speak in favor of a salary cap. First, you find the competent leaders. Then you negotiate a salary that will get the competent leader into that position. And you go with the best bargain (the best leader at the lowest price).

Well, actually, first you get rid of the incompetent leaders who lead their businesses into this mess. That has not been done yet, but it should be. The executive offices of businesses getting billions of dollars in government bailout money should be fumigated.

However, after those existing executives have been removed, their replacements should be paid what they are worth. If the most promising manager demands $1 million or he will take a job elsewhere, then he should be given his $1 million and be put to work clearing up this hundred billion dollar disaster. It makes no sense to put a hundred billion dollars under mismanagement for the sake of half a million in salary.


Anonymous said...

You didn't mention stock incentive at all. The company can pay executives additional compensation ,on top of the $500K, in stocks.

The stocks can't be cashed until all the public money has been returned. But that's great. It will encourage the executives to think long term because the compensation depends on his long-term performance.

Going back to your football teams. Here's another team, team 3, that is looking for a new head coach. He will be paid just so-so base salary, but he will be paid in untold riches if he wins the superbowl.

Now please argue if the potential pool of head coaches for team 3 is of lesser quality than team 1, or has less incentive to do good than team 1.

Anonymous said...

Actually I've long been thinking that a variant of the previous comment should be standard.

Ie: top management at any publicly traded company should be paid a certain sum in cash (eg: $100,000) & anything pay above that should be in the form of stock that they *may not sell* for some period, eg: until 5 or 10 years after the year they are paid that stock.

This would not guarantee good management, but at least make the incentives point toward thinking past the next quarter year.

Anonymous said...

Your assumption that the highest paid executives are the best is not substantiated, and, in my experience, false. Of course it would depend on the exact number of the salary cap, but I would expect plenty of perfectly adequate and talented people can be found.

Placebo said...

Throughout our nation's history we have asked young men and women to make sacrifices during times of crisis. Think of the millions that have been sent into war; hundreds of thousands losing their lives and even more suffering injuries.

The nation is in a different crisis now, but a crisis nonetheless. I don't think it is asking too much of these clowns who got us into this mess to sacrifice some excessive salary on the nation's behalf.

Nor is it outlandish to think that competent individuals will fill some of these positions. In fact, those are the individuals that will cure this mess; not the greedy bastards that currently inhabit these positions.

MrC said...

While there is no US government agency that can dictate the salaries of employees of private or publicly held companies, the president is (I believe) trying to point the finger at those companies that have overpaid individuals. This is largely a symbolic gesture as we all know, due to the fact that most executives get their largest chunk of cash from stock. I think the suggestion of putting time limits of several years on the stock payouts and basing those payouts on company performance is probable the more pragmatic solution.

Alonzo Fyfe said...

Obama's "solution" to this issue is built on the assumption that the executives who got us into this mess will keep their jobs, and they will be the ones handling the bailout money.

Whereas, what I am arguing is that the existing incompetents should be terminated and replaced with competent individuals - and that it is absurd to put up arbitrary barriers that could well get in the way of filling the jobs with the best people.

Oh, and I do not assume that the highest paid employees are the best paid. Quite the opposite - I agreed that there are many very poor employees who are currently being paid and who should not be.

I argued that it is difficult to keep the best employees without offering a competitive wage.

This is an "all squares are rectangles" (all good employees are well paid) but "not all rectangles are squares" (not all well paid employees are good) type of statement.

Well, not all, but as a general rule, this is the case.

Unknown said...

You really didn't answer the first comment either - about how the companies can compensate beyond the base salary. If the new head man has it in writing his salary is X once the bailout money is returned and he gets so much in stock - there's no reason why that can't be just as competitive. You've given a false analogy as a basis for your argument.

Anonymous said...

Problem is, "Team 1" coaches aren't being replaced, they're being given bonuses.

I don't like Obama very much but I do agree with the other part of this salary cap, which is that executives who've lied to the government about their money can't get bonuses either.

Anonymous said...

Honestly, I think that putting a cap on these guys salaries is a good thing. They shouldn't be making money off the tax payers.