There is so much demagoguery when it comes to compensation lately. The problem: someone gets a whole bunch of money at a bank, and the world goes apoplectic. They're paid too much. Oh, these payments are simply outrageous. But, are they really?
I'd like to take a stab at some debunking by using a sports paradigm. Let's try the Alex Rodriguez story:
1. Alex Rodriguez gets $26MM for playing baseball.
2. That's outrageous, right?
3. So he should get less, shouldn't he? Let's say, oh, $11MM less. Now I'm not sure why it's $11MM. I mean, why isn't $3MM less? Or why isn't it $24MM less? Well, since we're not letting the market decide, I guess I get to decide, and I say he gets $15MM. So there.
4. And then who gets that excess $11MM that we've so effectively saved? Well, a Steinbrenner gets it, I suppose. And that's good? That's better? Well, no one seems to think so, so Alex Rodriguez gets to keep his money. OK, fine. That seems to make sense, and everyone agrees, because everyone's made piece that there's no way the big bad owners should benefit from an outside substitution of judgment for the judgment of the market.
Hmm - interesting. Would the answer be different if we liked the Steinbrenners more? Would the answer be better if the Steinbrenners were perceived as a public good? Would the answer be different if the Steinbrenners were someone else? Would the answer be different if the Steinbrenners were a lot of someone elses? Would the answer be different if the Steinbrenners were a lot of someone elses who could buy Yankees stock on the market? So Packer and Patriot players should be treated differently? Seems to me the answers should be no, no, no, no, no and no - we should no more want a nameless public shareholder to benefit from a transfer of wealth via the underpayment of a talented individual than we should want the Steinbrenners to do so.
The example can be applied to a banking situation. Imagine a nonpublic Investment Bank ('member those?), such as we had in the not-so-recent past - one organized as a partnership and owned by its partners. Now, let's look at the hypothetical story of Star Employee X:
1. X, an employee and not a partner (these are my facts, so X is an employee), gets $26MM for being a star investment banker.
2. That's outrageous, right?
3. So x should get less, right? Let's say, oh, $11MM less. Now I'm not sure why it's $11MM. I mean, why isn't $3MM less? Or why isn't it $24MM less? Well, since we're not letting the market decide, I guess I get to decide, and I say he gets $15MM. So there.
4. And who gets the excess $11MM? Well, I guess the Bank's partners get it. And that's good? That's better? (Maybe outrage makes some sense here if we assume a totally unfair and corrupt leaking of money out through the use of an old-boys-and-girls network; but, silly me, I'm proceeding on the assumption, absent facts to the contrary, that there's high pay because the money is deserved and is there, and indeed is there at least in part as a result of the services in question.)
Hmm - interesting. Would the answer be different if everyone stopped vilifying competent professionals across a broad range of financial and other advisory fields? Would the answer be different if we liked the Bank's partners more? Would the answer be better if the Bank's partners were perceived as a public good? Would the answer be different if the owners of the Bank were a lot of someone elses? Would the answer be different if the Bank's owners were a lot of someone elses who could buy Bank stock on the market? Should the answers be any different? Again, maybe the answers to these questions should be no, no, no, no, no and no - even aside from the basic recklessness of transferring wealth away from working people, we should no more want a nameless public shareholder to benefit from the underpayment of a talented individual than we should want the Bank's partners to do so. I agree that public shareholders generally need to be protected from abuse, but submit that it's folly to suppose that there's some non-market way to determine the dollar amount at which too much has been paid.*
And yet that's where people seem to go with this - bankers should be paid less, so the owners (i.e., the shareholders) can have more. In terms of the underlying principles of market-based fair pay for services, baseball players fought and won this fight culminating in the Curt Flood case. Do we now want to put bankers in that kind of a position? I guess the answer is: maybe so. (Note also that the result of pay constraint in the case of major financial institutions is even more ironic in some ways, as the shareholders who would benefit are largely institutions, so that the big bad owner that would benefit from underpayment is just another institution at which we're probably equally angry. The money, once it's there, has gotta go somewhere.)
If it is conceded that it might be odd for there be a push to transferring wealth to the owners, there is at least one other approach. Maybe now it's time for me to second-guess, and surmise that X isn't really all that good, and that money should be paid to some other employees - the ones who deserve it more. And I guess I should make those decisions - the decisions of who should be paid what. Because I know the answers better than the people running the companies. Well, maybe I don't. Maybe it's the government who does? Kenneth Feinberg certainly seems to think so. Yeah, that's it. Riiiiiight.** THAT's the ticket.***
* I'm not here addressing the notion that taxpayer money might be coming in under the TARP and right back out as compensation, which is an unlikely scenario but, where applicable, a more troubling one.
** . . . as Bill Cosby would say.
*** . . . as Jon Lovitz would say.
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Sunday, October 25, 2009
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