Tag: executive compensation

Here’s an Idea . . .

. . . since the Geithner-Summers team seems to be looking for them.

Why not say that all bank compensation above a baseline amount – say, $150,000 in annual salary – has to be paid in toxic assets off the bank’s balance sheet? Instead of getting a check for $10,000, the employee would get $10,000 in toxic assets, at their current book value. A federal regulator can decide which assets to pay compensation in; if they were all fairly valued, then it wouldn’t matter which ones the regulator chose. That would get the assets off the bank’s balance sheet, and into the hands of the people responsible for putting them there – at the value that they insist they are worth. Of course, the average employee does not get to set the balance sheet value of the assets, and may not have been involved in creating or buying those particular assets. But think about the incentives: talented people will flow to the companies that are valuing their assets the most realistically (since inflated valuations translate directly into lower compensation), which will give companies the incentive to be realistic in their valuations. (Banks could inflate their nominal compensation amounts to compensate for their overvalued assets, but then they would have to take larger losses on their income statements.)

We can dream, can’t we?

How Do You Like Them Free Markets?

By now everyone knows about this past year’s Wall Street bonuses: $18.4 billion total, the fifth-highest total ever; the $4 billion in bonuses rushed through by Merrill Lynch before its acquisition by Bank of America; and John Thain’s demand for a personal $10 million bonus (which was initially a demand for $30-40 million, according to Felix Salmon). This has, not surprisingly, unleashed a torrent of rage against Wall Street, up to and including Barack Obama, who called the bonuses “shameful.”

The usual defense of this sort of behavior is that you have to pay the market price for talent, the bonuses for top people are only a small fraction of the value they contribute (not a particularly good argument this year), and so on. And this is, not surprisingly, what John Thain was able to muster up in his defense on CNBC:

If you don’t pay your best people, you will destroy your franchise. Those best people can get jobs other places, they will leave. . . . you have to– pay market prices at the time.

Yes, there is a market for labor, and compensation is the price set by that market. And maybe it’s even a free market. But it’s certainly not a well-functioning market (one where price = marginal cost, for example, or where the surplus is divided between the parties, or where the right incentives are created).

Continue reading “How Do You Like Them Free Markets?”