On Wed, 25 Mar 2009 20:21:45 -0700, Michael Smith wrote: >Well, it wouldn't change my opinion. >No one, I believe, should receive $742,006.40 bonus after taxes. >If that is the bonus, what was his salary!!!??? >And, whatever his salary was, he thinks he earned it because the areas >he was involved with made lots of money.
I think this response is representative of most people when they realize that the payment schemes they are familiar with don't apply to people in "executive" positions, at least for U.S. corporations. For some coverage of this topic, see the Wikipedia entry (standard disclaimers apply) on executive compensation: http://en.wikipedia.org/wiki/Executive_Compensation One useful way of thinking about executive compensation is what multiple is it of an average "worker" (which a college professor may or may not identify with). Quoting Wikipedia: |In 2007, CEOs in the S&P 500, averaged $10.5 million annually, |344 times the pay of typical American workers. This was a drop |in ratio from 2000, when they averaged 525 times the average pay.[17] Again, people would not ordinarily be familiar with such facts until the current economic unpleasantless occurred and we found out that "business as usual" (such as payment of bonuses) were being made. The failure of ordinary people to understand how executive compensation operates can be thought of as a form of "economic illiteracy". It may come as surprise to some that economists have studied the issue for long time. Thomas Cooley, prof of economics and dean of NYU Stern School of Business (which, as the name for a college inplying strict discipline, is only half as funny as the Stern College for Women), writes briefly on this point in Forbes where he pens a regular column. Quoting from his 02/04/09 article "Bonuses for Boneheads": |Oddly enough, the compensation problem has been studied a lot |and we (economists, that is) think we know a lot about it. The problem |is a classic principal-agent problem with unobserved information: How |do you structure rewards for agents (managers) so that they make |decisions that are in the long-term interests of the principals (the |shareholders)? Aligning those interests over a long-time horizon should |lead to wise decisions on the part of managers. | |The theory can be complicated, but the applied implications are fairly |transparent and sensible. Lots of research shows that the best way to |align interests is to give managers significant stakes in the future value |of the company in the form of deferred compensation and restricted stock |grants whose value can only be realized over longer-time horizons if the |firm does well. Stock options are an inferior way to do this. [snip] |Back to bonuses. The basic premise of bonus-based compensation--pay |for performance--is clearly a good one. And lock-up provisions, deferred |compensation and stock-based incentives ought to work. Then again, |securitization is a good idea, as is subprime lending in the right circumstances |(you have heard of microfinance?). The devil is in the execution. That is why |it is useful to look at 14A reports, because they uncloak the people responsible |for the execution--the compensation committee of the board. | |The mood in the country seems to be the following: If executives want to |pay themselves and their managers lots of money, that is between them and |their shareholders; but if they are taking taxpayers' money in the form of bailouts |or other aid, then it is everybody's business and we have a right to dictate |what is allowed. It is hard to believe that we will have more efficient outcomes |if Congress starts dictating rules for executive pay, putting limits on compensation |and eliminating bonus plans. But, sadly, the masters of the universe have fouled |their own nest. http://www.forbes.com/2009/02/03/bonuses-wall-street-opinions-columnists_0204_thomas_cooley_print.html or http://tinyurl.com/dnkfhu Key point: executive compensation is usually determined within the company through a compensation board and presumably with the support of stockholder (who could void the plan by voting against it). If a corporation wants to pay its executives on the order of 500 times the averge salary of your typical working person, that's their business. This, of course, will become a contract and have all sorts of legal implications. As taxpayers we may become outraged at the compensation packages executive receive but is the outrage due to (a) the amount of money they are receiving relative to ordinary folk or (b) their compensation is potentially coming from taypayer "bailout" money? If the outrage is due to (a), where was the outrage prior to the current economic unpleasantness? Many were working on these issues (e.g., see http://www.aflcio.org/corporatewatch/paywatch/ ) but most people were oblivious to it or didn't care. If the outrage is due to (b), many of the corporations that received "bailout" money will try to return it as soon as possible so they can return to "business as usual" without the oversight of those congressional snoops. AIG may take longer to "unwind" but, really, why the outrage? This is business as usual. Shouldn't the outrage, if based on (a), have been in public view for decades or at the very least, since the passage of the 1999 law known as the "Gramm-Leach-Bliley Act"? (see: http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act ) >Unlike most Canadians and probably Americans I think salaries and bonuses >like this far exceed anyone's contribution to anything. No one should ever >be paid these amounts. Democracy and Capitalism are not the same thing. Doesn't that depend on how one defines "anyone's contribution to anything"? If one can come up with sophisticated mathematical tools that allows one to come up with financial derivatives or instruments that can earn billions of dollars, what should that person's financial compensation be? (For derivatives see: http://en.wikipedia.org/wiki/Financial_derivatives ) Consider the case of "Jim" Simons who was at one time a mere professor of mathematics at SUNY-Stony Brook (coincidentally, I was working on my Ph.D. there) who, after a successful career as an academic, decided to make some real money by applying his mad math skills to the development of hedge funds ("Renaissance Tachnologies"). For more on Simons, see: http://en.wikipedia.org/wiki/James_Harris_Simons Simons' fund also led hedge funds in terms of earning for 2008: +$2.5 billion: http://www.boston.com/business/articles/2009/03/25/a_list_of_the_top_hedge_fund_managers_in_2008/ or http://tinyurl.com/cfp78j But, just to show that Simons is only human, he recommended Bernie Maddoff's fund (aka Ponzi Scheme) to the Stony Brook University Foundation. Sometimes mad lying skills trump mad math skills. -Mike Palij New York University [email protected] >--Mike On Wed, Mar 25, 2009 at 8:45 PM, Christopher D. Green <[email protected]>wrote: > > So, this has absolutely nothing to do with teaching psychology, but you are > interesting people who like interesting things. It is a letter of > resignation from an executive at AIG that may change your view of the > current bonus scandal. > http://www.nytimes.com/2009/03/25/opinion/25desantis.html --- To make changes to your subscription contact: Bill Southerly ([email protected])
