Comments on: How Do You Like Them Free Markets?

By: Politics or Poppycock

Politics or Poppycock — Tue, 10 Feb 2009 17:16:36 +0000

[...] but they have flaunted their power – and their arrogance – through paying themselves large and largely inappropriate [...]

By: engineer27

engineer27 — Mon, 09 Feb 2009 14:14:08 +0000

Michael Lewis, in _Liar’s Poker_, describes how Salomon watched their most productive traders walk out the door (by not paying “enough”) and head up trading desks at other firms, thereby surrendering a monopoly on certain kinds of trading that made the firm incredibly profitable.
This was market action at work, but Wall Street learned the wrong lesson from it, as J.K. elaborates.

By: C Dan

C Dan — Mon, 09 Feb 2009 12:10:18 +0000

I wonder what the ideal number of owners is for a private enterprise. It would be interesting to explore whether the returns in private / closely held companies were better than for large public companies with dispersed ownership.

In my (limited) experience that hasn’t always been the case, but I’ve never seen an academic tackle the question.

By: J Rolfes

J Rolfes — Sun, 08 Feb 2009 23:53:03 +0000

Sounds like both the board members and senior management’s interests need to be alined a bit more closely with other shareholders.

Instead of cash compensation, the vast majority of senior management’s pay should be in the form of stock options, excercisable only after a period of time (5 years?) and then only at the rate of say, 10% per year.

As for boards, I suppose if each board member had to own stock as a significant percentage (10% or more) of their net worth, they might be more inclined to be a bit more focused on status as shareholder…

By: Mitch

Mitch — Sun, 08 Feb 2009 22:56:20 +0000

James,
I think you’re leaving out one other important factor on executive compensation: boards are frequently made of up peers, and those peers have their own salaries set by their own boards based in part on those salaries they set as board members for other companies. I hope that’s not so convoluted as to be incomprehensible.

By: Eben Walker

Eben Walker — Sun, 08 Feb 2009 19:29:02 +0000

“The conventional wisdom is that you have to pay the traders a lot, so everyone goes along with it, whether or not it’s true, because of the risk of stepping out of line.”

This is weak.

In baseball and movies where individual performance is critical we get high salaries and bonuses. This is just the equilibrium these industries have reached. Will the team, or the company, hurt when individual performers walk out the door. You bet. All those traders are looking at the talk from DC and are saying “can we leave here and start our own firm”. Some of them will — usually the most productive. (In baseball they can’t start their own team but in movies they start production companies.)

When an individual makes many millions for the firm, maybe it is rational to fear losing them.

RE Goldman Sachs: I think you mis-understand the culture. Doubtless – pricing was never the issue. Goldman paid extremely well. They just had an enormous bench depth and a culture that believed they already employed the best. Why hire unknowns from the outside?

By: James Kwak

James Kwak — Sun, 08 Feb 2009 16:13:48 +0000

That’s a good question. Given that the CEOs of Wall Street firms make plenty for themselves, the question is why they seem to prefer to give the rest to their employees rather than the shareholders. I have two guesses. One is that it has to do with weak corporate governance – shareholders are represented by the board of directors, but they don’t really act in the interests of the shareholders. But that should apply equally to all companies.

The other guess is that it’s just the equilibrium the industry reached. The conventional wisdom is that you have to pay the traders a lot, so everyone goes along with it, whether or not it’s true, because of the risk of stepping out of line. Whereas in chicken production, the conventional wisdom is that you can squeeze the workers. This conventional wisdom is more likely to arise in industries where labor is thought to be more important than capital, and you are therefore more afraid that the company will be hurt if the people walk out the door.

By: Richard Warfield

Richard Warfield — Sun, 08 Feb 2009 06:29:04 +0000

James,

Can you explain WHY executives on Wall Street run their firms for the benefit of a large class of professionals, rather than strictly for their own benefit (as you assert is the case for other firms)? Wouldn’t it make more sense for these executives to squeeze the compensation of lower-level employees in order to raise profits and thus their own wealth?

Richard