Tuesday, January 05, 2010

Bail-out Bankers' Compensation

This is a fascinating-- and infuriating-- article from last Sunday's New York Times Magazine:
What's a Bailed-Out Banker Really Worth?

Here's a few outtakes from this story, which details how Kenneth Feinberg went about negotiating (rather than czar-ishly dictating) compensation packages for top executives at companies bailed out under the TARP program:

Citigroup and Bank of America, for example, concluded that everyone in their executive suites [deserved multi-million dollar compensation packages because they were] above average when compared with peers at other giant banks that didn’t need a bailout. Or there was A.I.G.’s behind-closed-doors argument against Feinberg’s directive to pay its top people in large part with A.I.G. stock. The company’s reasoning? That the stock — trading briskly at the time at around $40 on the New York Stock Exchange — was actually worthless.
How does anyone actually say that with a straight face? "I want my $10 million bonus in cash from the US government, because the stock of the company I'm running has no value!"

Here's another gem:
That Dodd led the attacks on A.I.G. when what came to be called the retention bonuses were revealed infuriates [an unnamed friend of the author's, who works at A.I.G.]. He says that his boss asked everyone at A.I.G. Financial Products “to contribute the maximum to Dodd, because he was so important in Washington in terms of regulating the products we sell.” My friend went on to say: “Before he attacked us, Dodd was in our office” — in Wilton, Conn. — “giving a speech telling us how great we were. And our checks were in envelopes stacked up right there.”

Federal Election Commission filings show 31 maximum $2,100 contributions to Dodd during the last quarter of 2006 from employees of A.I.G. Financial Products. My friend’s former boss, A.I.G. Financial Products’ head, Joseph Cassano, who is listed as giving $2,100, did not return calls to his home, nor did his lawyer return calls seeking comment.

Asked about the event, and about checks stacked on a table, Dodd said: “Yes, it happened. I remember having a fund-raiser there. . . . I can’t finance my own campaigns. I have to raise money,” he added. “But what does this guy think? That if they give me money I have to do what they want me to do? That tells you something about them.”

Of course this sense of entitlement isn't just an issue at TARP companies-- almost all big corporations now operate in this rather closed world where all their top executives sit on each other's boards and reinforce the idea that they "deserve" more and more money:

“The boards of these companies just don’t have an arm’s-length relationship with these executives,” says Lucian Bebchuk, a Harvard Law School expert on executive compensation who advised Feinberg. Board members are frequently executives or board members at other big corporations, Bebchuk explains, and therefore are likely to be steeped in the same entitlement culture. Indeed, they are lavishly paid, too; in 2008, A.I.G. board members earned an average of about $300,000 for their work in 2007, the year when apparently unsupervised trading in toxic financial products destroyed the company.

“No director wants to be the skunk at the garden party,” says Sonnenfeld, the Yale Management School associate dean. “And the headhunters, whose compensation, by the way, is based on how much executives make, won’t pick them for boards if they’re going to be dissenters.”

Which leaves us with this stat:
Over the last 50 years, the ratio of top pay to average pay at public companies has multiplied roughly 11 times (24:1 to 275:1). That’s more pay in one workday for the chief executive than his average employee makes in a year.
Are top executives really working that much harder these days? Are they really delivering that much more value to shareholders? I don't think so, and I just don't understand why more people aren't furious about it. Everyone who holds shares in public companies, in the form of stock or through mutual funds in your 401k, is affected by this-- this is millions and millions of dollars that could be paid out in dividends to shareholders, or invested in more workers and new technology to help the company and the economy grow. Instead, it's going into the pockets of a tiny, well-connected group of people who think they can use that money to buy politicians and elections, not to mention an awful lot of personal luxury (not all of which is necessarily stimulating the economy within our borders).

I have no problem with people getting rich. There will always be a small number of people at the top of the pyramid, and many of them will have done something extraordinary to get there, something that will have provided value to millions of other people, in the form of money or convenience or entertainment, etc. But something is seriously screwed up when executives who have destroyed value, destroyed livelihoods and nearly destroyed an economy still think they deserve to earn more every single year than 90% of Americans will ever earn in a lifetime-- even when their big paycheck is coming straight out of taxpayers' pockets.

The article ends on a slightly optimistic note, hoping, as I do, that there's a way to use the ideas of people like Kenneth Feinberg and Warren Buffett and others to more fairly structure compensation on a broader scale, to appropriately reward good performance and encourage innovation while curbing the kind of risk-taking that leaves taxpayers holding the bag when things go wrong. But a lot of attitudes are going to have to change for that to happen.


Crystal said...

You hit the nail on the head with the word "infuriating".

Optioned Unarmed said...

“Over the last 50 years, the ratio of top pay to average pay at public companies has multiplied roughly 11 times (24:1 to 275:1). That’s more pay in one workday for the chief executive than his average employee makes in a year.”

Look, I know it doesn’t seem fair, but this is absolutely necessary. In the past couple decades, productivity gains have been enormous. New technologies have resulted in much more work being done with less effort than ever before. Meanwhile, the benefits of this increased productivity have to go somewhere. And while the high-paid executives are not, in general, working any harder than they were before (and are possibly working less hard), it still makes sense for them to be the primary beneficiaries. If these gains instead went to workers in the form of increased salary, regular workers would make a lot more money, or they would have the flexibility to work significantly less and still make ends meet. Obviously, this is not a desirable outcome, for many reasons.

Jim said...

Optioned Unarmed, it's kind of ridiculous to say exorbitant executive pay is "absolutely necessary." True, the benefits of increased productivity have to go somewhere, but even if you accept that workers shouldn't be reaping those benefits, I would still argue that shareholders (you know, the owners of public companies) should take priority over a few executives massing hordes of cash.

And that's ignoring the obvious question of why increased executive salaries wouldn't have the same result you're saying larger worker salaries have. Are you arguing that executives are immune to your proposed undesirable effects of having the "flexibility to work significantly less and still make ends meet"?

I wonder if I'm just feeding a troll.

Optioned Unarmed said...

Heya Jim,
Not a troll, but I was definitely joking... Simply to highlight the absurdity of the current situation. In a parallel, less corrupt version of our world, we would have an enormous middle class right now, and that would be a very good thing.

Sfaith said...

I don't think there's any hope of this changing. The small group of people who control our money supply is too powerful.