Comments on: Two Things That Have Nothing To Do with Each Other

By: Joe

Joe — Sat, 11 Apr 2009 05:21:31 +0000

Norman Augustine said best in his book Augstine’s Laws:

“There are many successful businesses in the United States. There are also many highly paid executives. The policy is not to intermingle the two.”

By: Frontrunning: April 8 | Bear Market Investments

Frontrunning: April 8 | Bear Market Investments — Wed, 08 Apr 2009 13:59:07 +0000

[...] 2008 CEO Compensation vs total return (Baseline Scenario) [...]

By: adios amigos

adios amigos — Wed, 08 Apr 2009 04:49:32 +0000

Smorg,
Should a guy that bolts a fender on a Chevy at some factory in Detroit get paid $60 per hour?
I think perhaps not, as that scenario didn’t work either.
AA

By: adios amigos

adios amigos — Wed, 08 Apr 2009 04:44:06 +0000

Tony,
I believe that most clear thinking people feel exactly as you do. While there is no longer any doubt that everything you referenced above is clearly true, what’s the solution? I feel these people no longer have any fear – none. They certainly don’t fear the courts, because they rarely end up being prosecuted. I believe that this last bomb was deemed to be “to big to be prosecuted”. I actually believe thats the current philosophy. Besides, what are you going to do? Lock up every person in the mortgage business for the last 5 years? Won’t happen. Besides, remember, what they were doing wasn’t illegal. Immoral, yes. Illegal, no. So, focus your outrage on your elected officials. They clearly were in the pocket of “big finance”. No doubt about it. Can you say Chris Dodd?
AA

By: Strat

Strat — Tue, 07 Apr 2009 22:20:23 +0000

Um, the point isn’t excessiveness of compensation. The point is that compensation is unrelated to performance.

BTW, James it would be nice to add a regression line with coefficient and t-statistic to the log-log chart.

By: Smorgasbrot

Smorgasbrot — Tue, 07 Apr 2009 20:09:08 +0000

I always wonder why CEO pay is regarded as variable or incentive based. It is not! It is a “sunk” amount: promised in advance and not under control of the CEO himself. His pay package is a mere lottery ticket that won’t change his behavior or performance.

Simple econ theory on incentive pay shows that Pay is a function of some measure of output (Q), be it sales, or profit or what have you more. Output then is a function of effort (E) and good/bad luck (u):

In short Pay = F(E, u)

To make incentive pay work, output (Q) should be measured verifiably and unambiguously. Also, ideally, one should not reward a CEO for just being lucky, or punish him severely if something really bad happened to him (e.g. incurable disease) that screwed up his performance. So, one should be able to distinguish effort from good/bad luck to some extent. These are some simple assumptions that make incentive pay work, in theory, that is. But still, I think these assumptions make sense.

The thing is, CEO output cannot be measured, neither can it be related to either effort or luck. Yep: some basic conditions that should make incentive pay work do not exist in the corporate world. CEO’s received massive pay for output that cannot be measured. They also received pay from executive options and shares that happened to have a high value for a reason far beyond their control (that is luck, and we don’t want to reward CEO’s for just being lucky).

Interestingly, output can be measured at simple jobs: sex-work, door-to-door sales, bounty hunters, lap-dancers, selling ice-creams. Isn’t it bizarre that CEO’s receive incentive pay and in doing so put themselves on par with prostitutes?

By: The Performance Debate « Patterns of Work

The Performance Debate « Patterns of Work — Tue, 07 Apr 2009 16:41:11 +0000

[...] to provide a strong link to pay. James Kwak, writing for Baseline Scenario in a piece he titles Two Things That Have Nothing to Do with Each Other, shows us a chart that is perplexing at [...]

By: Terry

Terry — Tue, 07 Apr 2009 03:12:05 +0000

“Retention bonuses” are not actually used to retain “key” employees. Rather the self-selected “key” employees dreamt up the notion of “retaining key employees” as a pretext for taking as much as the they could while the taking was good and tying a nice “contractural” bow around it. It’s revolting.

By: mistah charley, ph.d.

mistah charley, ph.d. — Mon, 06 Apr 2009 13:07:21 +0000

I’m not an econ geek, but one thing I’m going to do is to show up at a demonstration sponsored by “A New Way Forward” on Saturday, April 11 at 2 pm – a number of U.S. cities will have one. Bill Moyers and William Greider mentioned this group in their discussion on Moyers’ March 27 show – Greider is an advisor to and sponsor of the group.

http://www.anewwayforward.org/the_idea/

Their aims are:

“NATIONALIZE: Insolvent banks that are too big to fail must incur a temporary FDIC intervention – no more blank check taxpayer handouts.

REORGANIZE: Current CEOs and board members must be removed and bonuses wiped out. The financial elite must share in the cost of what they have caused.

DECENTRALIZE: Banks must be broken up and sold back to the private market with new antitrust rules in place– new banks, managed by new people. Any bank that’s ‘too big to fail’ means that it’s too big for a free market to function.”

By: Paris Biltong

Paris Biltong — Mon, 06 Apr 2009 11:22:03 +0000

What I’d like to know is whether there were retention bonuses during the Great Depression. Why would you want to pay people bonuses to stay in their job when jobs are vanishing like snow in the sun and those people have nowhere to go? Is anyone hiring away AIG senior executives? Are the bonuses intended to keep them from jumping out windows? Perhaps.

By: BobR

BobR — Mon, 06 Apr 2009 10:28:35 +0000

So, what *is* CEO compensation correlated with?

How about market capitalization? Or, gross income?

Or, number of board members who went to college with the CEO?

There has to be something which sets the magnitude of compensation for CEOs, and if it’s really nothing more than market capitalization, then CEO compensation is just a tax.

By: Vil den sidste bastion ogs� falde? - Boligdebatten.dk

Vil den sidste bastion ogs� falde? - Boligdebatten.dk — Mon, 06 Apr 2009 09:47:35 +0000

[...] jeps ditto aktier og �konomisk aktivitet. Men vil kompensationen til de k�re CEOs ogs� falde. Two Things That Have Nothing To Do with Each Other � The Baseline Scenario (Cheap shot I [...]

By: Uncle Billy vs. Mont Pelerin

Uncle Billy vs. Mont Pelerin — Mon, 06 Apr 2009 07:22:50 +0000

Was this just a nicely deft backhanded way of pointing our attention to Mosaic (Cargill/IMC Global Phosphates & Potash powerhouse)?

There’s been a lot of fertilizer going around on the blogs the last few years, so it makes sense. Don’t they make bombs out of that stuff too? If so, what percentage of it goes to agriculture/other and what percentage to manufacturing weapons?

By: Peter B

Peter B — Mon, 06 Apr 2009 06:14:35 +0000

Great chart-:) – and here is a response from an FT article – “Some banks have warned that the “Pay for Performance Act of 2009” recently passed by the House of Representatives would diminish their appetite to take part in government financial rescue schemes because it would impact their ability to pay top management” – same old story-:)

By: curious

curious — Mon, 06 Apr 2009 05:46:10 +0000

HERE IS ONE LITTLE IDEA: SUSTAINED OUTRAGE REPRESENTED IN REGULAR, OBSESSIVE LETTER WRITING TO OUR NON-REPRESENTING ELECTED OFFICIAL REPRESENTATIVES…that’s all i know to do.

I hope you will get more ideas Greg- I’d like to know too!