WSJ: The New Wage Controls

Discussion in 'Economics' started by Tom B, Jun 12, 2009.

  1. Tom B

    Tom B

    The New Wage Controls
    One more sign that the levelers are now in charge.

    The U.S. "market" economy took another hard-to-believe turn this week with the Obama Treasury appointing a "compensation czar" to dictate wage controls on private companies that take taxpayer money and offer guidelines for every other U.S. publicly traded company. Can wage and price controls for everyone be far behind?

    The Treasury says that's not what it has in mind, but then much of what government has done in the past eight months would have been scoffed at even a year ago. Richard Nixon disavowed wage and price controls right up until the time he imposed them in 1971. The Obama Administration is hardly restrained as a matter of principle against such brute government force, and if prices start rising after our current Great Reflation, well, you read the warning here first.
    [The New Wage Controls] Associated Press

    Obama 'compensation czar' Kenneth Feinberg.

    What's amazing is how little stir the new maximum wage edicts have created. Part of this is because Washington has the business class intimidated, and part is because much of the public thinks bankers deserve the retribution. "The financial crisis had many significant causes," said Treasury Secretary Timothy Geithner on Wednesday, "but executive compensation practices were a contributing factor. Incentives for short-term gains overwhelmed the checks and balances meant to mitigate against the risk of excessive leverage."

    Mr. Geithner has a point, but his analysis also neatly avoids Washington's own role in encouraging "the risk of excessive leverage." Wall Street's compensation model of big bonuses for big risks has been in place for decades. How do you think Robert Rubin and Jon Corzine made fortunes at Goldman Sachs in the 1980s and 1990s?

    What changed this decade is that Washington's housing policies and flood of easy money created a subsidy for credit, and especially for mortgage products, that encouraged bankers to take on even more debt and greater risks. The bankers were doing, in short, what Alan Greenspan and Barney Frank subsidized them to do. Blaming the bankers for making bigger money in the bargain is a political diversion.

    Corporate boards and compensation committees could certainly have done a better job at any number of companies. But some of Mr. Geithner's statement of principles on pay are little more than the bromides that every compensation consultant has loaded in his PC for a corporate business pitch. Everyone agrees that "compensation plans should properly measure and reward performance." The question is how to do it. Government bureaucrats aren't likely to do this any better than directors who at least have some insight into the business at hand.

    Mr. Geithner also wants compensation to "be structured to account for the time horizon of risks." Another terrific idea. But with some financial instruments having lifespans measured in decades, there are limits to that principle's real-world application. Yes, some firms paid big bonuses to traders whose bets later blew up, but we doubt they need a "pay czar" to tell them that this wasn't a great idea.

    Treasury is also proposing more "transparency and accountability in the process of setting compensation," which is the mother of all bromides. The SEC under Chris Cox recently rewrote the public disclosure rules on compensation on precisely these grounds. The Obama Administration wants to go further and is proposing nonbinding requirements to give shareholders a "say on pay" for publicly traded companies. This is supposed to align shareholder interests with those of the executives.

    But can shareholders really offer informed opinions on whether, given the nature of a company's business, prospects and competition, a particular executive deserves incentive pay with three-, five- or seven-year vesting periods; or whether the mix of restricted stock, options and other compensation is the "right" one? Say on pay is a hobby horse of the political left because it offers a platform to demagogue executive pay without doing anything about it.

    Some in the White House may figure these measures will be enough to sate the political taste for revenge. But once you concede the principle that government should influence pay, it's hard to stop Congress from actually setting it. Mr. Frank has already declared that the Treasury guidelines don't go far enough, and one thing we know this Administration doesn't do is stand tall against Congress. Recall the AIG bonus mob.

    The new pay limits betray once again that Washington's dominant impulse today is leveling and redistribution: Put caps on success, raise taxes on what you can't cap, and then give the money to someone else. None of this will encourage the entrepreneurial spirits we need for a buoyant economic recovery.
  2. Just for balance.

    If after reading this, you can't either see how the taxpayer needs some sort of protection against corrupt boards' of directors in cahoots with CEOs, than you will never get it.

    This is bullshit.

    I'm all for keeping government out of the affairs of viable entities, and even broken ones, but when those entities take massive amounts of taxpayer dollars and pull bullshit like this, my blood boils.

    Thursday, June 11, 2009

    Bank execs still cash in on the way out


    Despite efforts from the government to limit executive compensation, many banks are still paying out huge sums to departing CEOs. Steve Henn reports in collaboration with the investigative newsroom ProPublica.

    Kai Ryssdal: Before the administration's big announcement yesterday about its latest idea for executive compensation reform, its third try at it by the way, Congress had already spoken. Laws are already in effect that limit golden parachutes for banks that accept federal aid. But that hasn't stopped a lot of banks from paying huge sums to executives who are on their way out the door. Marketplace's Steve Henn reports now in a collaboration with the investigative newsroom ProPublica.

    STEVE HENN: Mac Whittle built the bank, the Southern Financial Group, from the ground up. He founded it in the 80s and then bet heavily on the Florida real-estate market during the boom.

    When the bust hit, large shareholders like Jack McMullen saw their stock investments collapse.

    JACK McMullen: It went from $25 a share down to a low of I think about 65 cents.

    McMullen says he lost more than a million dollars. And by late October it was obvious to him Southern Financial needed government aid to survive. The same day the bank applied for to the Troubled Asset Relief Program it also moved up the retirement date for Whittle, its CEO.

    McMullen: They sent him out the door with $17 million.

    Investors like McMullen were furious. If Whittle had stayed on after the bank accepted federal aid, his golden parachute would have been considerably smaller.

    But despite TARP's ban on lavish severance packages, big payments for departing executives have continued.

    Paul Hodgson is at the Corporate Library, a consulting firm that tracks executive compensation.

    PAUL Hodgson: Almost as soon as these regulations came out, there were concerns that companies would immediately employ consultants to try and find a way around it.

    In February Congress tightened the screws, banning all severance payments for top executives, and yesterday the administration issued new rules. But many banks already found ways around the ban.

    Associated Banc Corp, based in the upper Midwest, took half a billion dollars in federal aid last fall. Then this May it paid its chief operating officer, Lisa Binder, $1.6 million to leave. But don't call it a golden parachute. Instead, Binder signed an agreement not to compete against the bank. The Corporate Library's Hodgson calls that cheating.

    Hodgson: This is obviously a move on their part to somehow get around semantically the clause in the TARP regulations that prohibits payment for doing nothing.

    In Virginia, Hampton Roads Bancshares took more than $80 million in federal aid, then paid it's departing CEO Jack Gibson $1.3 million. The bank's also paying for Gibson's car and his golf club membership.

    But this deal wasn't a severance either. According to the bank, it's a three-year consulting contract with a twist. Gibson was paid entirely upfront. And the bank says the Treasury Department signed off on the deal.

    JAMES Reda: The consulting agreement is a tried and true way of not calling something a severance.

    James Reda is a New York based compensation expert. He says sometimes it's worth it to keep a former-CEO on the payroll but...

    Reda: My experience has been that after about six or seven months, he or she runs out of things to do and it kinda becomes a sham at that point.

    Starting this week Kenneth Feinberg, a prominent Washington lawyer, will begin serving as the so-called special master for executive compensation for TARP. Gene Sperling is an economist and advisor to Treasury Secretary Tim Geithner. He says Fienberg will have considerable power.

    GENE Sperling: He will have the authority to review the compensation plans for the companies who we have described as receiving exceptional assistance.

    Companies like AIG and GM. But more than 500 banks that have received TARP money are not going to be supervised by Fienberg.

    In the past six months more than half-a-dozen of those banks have paid executives to leave. One bank bought its former CEO's house, others have offered to defer guaranteed payments. And it's unclear if Treasury can or will do anything to get this money back.

    In Washington, I'm Steve Henn for Marketplace.
  3. Daal


    I guess when Obama czar chooses the pay and compensation of half of berkshire subsidiaries CEOs Buffett will finally throw the towel and admit the US is getting worse
  4. lindq


    Geithner has said repeatedly that any controls are only to be placed on those companies that have accepted public funds for their survival.

    I don't have any reason to suspect otherwise, nor do I have a problem with the compensation controls under these circumstances.

    While it is sad that finance business leaders are being intimidated by the likes of Barney Frank and his ilk, considering that they ran roughshod over shareholders for 8 years under Bush, they don't have a lot to complain about.
  5. Tom B

    Tom B

    I disagree. I think the TARP companies are only the first step. In fact, Barney Frank is working on a bill pertaining to executive compensation for all public companies. The rules may be different than those for the TARP companies; however, the government will still get involved.
  6. Daal


    You are absolutely right, this sets a precedent, maybe it wont be even this congress but the crackdown on capitalism culture is gaining strength every month
  7. all we need is a law that all salary increases or bonuses have to be voted on by shareholders.
  8. maxpi


    If workers continue to be left behind at the rate they have been for the last few decades there won't be ANY consumers. Flattening the corporate pay structure from top to bottom would be a great thing to do really.

    I worked for a corporation that made medical implantables. The "leader" was some fricking lawyer. He had hundreds of millions in stock. The value system of the entire organization could be summed up by one word; "cheap". Accounting guys that we engineering folk never met, that knew nothing about our projects, would sit on our purchase orders or scuttle them to get their bonus... workers were worked to exhaustion and nervous breakdowns in manufacturing... the total employee headcount was 10,000 or so. You could not collect on the health insurance, they just would not pay...

    So I say, shoot the attorney, take his stock and use it to expand the workforce by a few thousand or somehow use it to make a better product and happier employees...

    In the US the role of a corporation is defined by the Supreme Court as that of making money. We need to redefine that role to include some attributes of responsibility towards environment, workers and customers...
  9. lrm21


    I'm still looking in the constitution where exactly it says that as a citizen I am responsible for bailing our private enterprises

    I don't buy the bullshit that the companies took the money so now they can't complain.

    Bank loans don't have executive compensation clauses

    If you are too stupid to see that this was a crisis engineered by a government and big business cronies then turn in your voter cards and passport please and GTFO

    These rules will never effect the big boys becuawe they buy the votes

    But I guarandamntee you that mid level and small business an those out of favor withe the powers that be will have these controls imposed at some point
  10. when you took government class about the constitution,if you did, do you remember anything about represenative government? you elected a represenative to decide in your behalf weather or not to bail out a private enterprise. they decided yes.
    #10     Jun 12, 2009