Wednesday, March 18, 2009
Posted by John S. Wilson at 11:13 AM
By John S. Wilson
Phoney Populism -
Tuesday, March 17, 2009 11:31 PMI'm sure you've noticed the rampant populism oozing out of your favorite news anchor or your not-so-favorite politician; they're mad at this and they're mad at that. I have thought to tell these folks what my father used to tell me: there's no point in getting mad unless you plan on doing something about it. And they don't.
The latest version of populism du jour is specifically bonuses offered at bailed out financial companies (e.g., AIG) and in general executive compensation and pay caps. In a New Republic piece Kennedy School of Government Professor Pepper Culpepper, a corporate governance expert, had a peculiar suggestion on how to curb excessive pay. He states:
Here's a better idea: the Financial Services Committee could annually identify the top two executives whose compensation is most out of line with company performance. In recognition of their monstrous pay and of Congressman Frank's past legislative efforts, these could be called the Frankenpay awards. Winners of the awards would be required to testify before the committee about the details of their pay packages. Boards of directors will think twice before approving a pay package likely to land a CEO in front of Congress, and they would not be able to avoid the cap on direct pay by choosing alternative payments, such as stock options, because the awards would target the whole compensation package.3 reasons come to mind as to why this wouldn't work. (1) How would Congress define an executive whose compensation "is most out of line with company performance?" Would it be based on contributions said executive made to his division or the company as a whole? And based on what time table? Derivatives traders at AIG (the guys who are most blamed for the company's losses) did a great job in 2007. Only problem is those credit default swap contracts they traded didn't do so well in 2008. (2) Even if you could establish a consensus on how executives would be evaluated, wouldn't the extensive lobbying done by high profile Fortune 500 companies somewhat shield them from the embarrassment Professor Pepper envisages? Most likely. It's not to say legislators can be bought, but lobbying might as well be an unwritten lease (Madoff's political donations total $200,000 over 18 years and the SEC received numerous tips they didn't act upon, think it bought him a little less scrutiny?) (3) The little guy may not be enamored with what executives take home, but I think he secretly thinks they deserve it. I'm serious, stay with me here.
Pepper notes how "[b]etween 1996 and 2000, CEO pay jumped from 100 to almost 300 times that of the average American worker, according to the Economic Policy Institute. Yet press coverage of the issue in three major national newspapers increased only slightly" and I think I know why. These executives are captains of industry, highly educated, frequently well-spoken, and disproportionately male and upper class. Let's face it society is and has always been somewhat enamored with these guys, even though at times it can be a testy relationship. We're told that without them capitalism wouldn't be the same; charities would become nonexistent without their massive donations (legislators have used such arguments in opposition to Obama's charitable deduction change, though it's estimated to affect giving by 1.3%); they create many jobs through their genius and business acumen; and the middle class and, for that matter, the nation owes its gratitude to these soldiers of fortune. Sure, every now and then we put on our populist masks and scare unsuspecting C-suite executives with our rants and threats - but our volume is low, threats empty, and time frequently runs too short. We've got a few minutes of this left then everything will go back to normal.
*Professor Culpepper was kind enough to respond this article by email:
Dear Mr. Wilson,
The time horizon of evaluation is a fair point (probably one that regulators are going to be grappling with as the deal with strengthening clawback provisions). The central point you make—that the little guy doesn’t care—I agree with. But not for the reason you suggest, which is that the little guy thinks these awards are deserved. There is very little evidence to support that proposition. Instead, there is a pattern of popular outrage after scandals (the current problem is more than a scandal, but is that too). This then alternates with inattention—true of many political issues, but not evidence that people support these salaries. I don’t have a position about what salaries are acceptable or not, but I do tend to share popular outrage when someone whose company goes bankrupt gets $35 million.
The great thing about Frankenpay is that if you are right—that it becomes hard to set criteria that are generally agreeable—then the awards will be a non-story. And it costs the government very little to put a couple of staffers on this task. But this sort of naming and shaming just identifies what is going on, as on occasional prompt to shareholders to monitor what is going on in their companies.
New Majority - http://www.newmajority.com/ShowScroll.aspx?ID=0ebf2065-f335-4b42-b8bc-e6cd99a766ce
Hip-Hop Republican - http://hiphoprepublican.blogspot.com/2009/03/populisms-15-minutes-of-fame-is-almost.html#links