Obama orders pay cut for execs at rescued firms

[Martinus]

I don't see why having talent spread to other sectors of the economy is such a bad thing. I  was always taught to believe that was the essence of capitalism: the resources and talent goes to the most profitable use.

The essence of capitalism is that the *price mechanism* directs resources and talent to the most profitable use.  This is not the price mechanism, it's government fiat.  The counterargument to that is that the executive compensation system is broken, and government fiat more closely reflects the market value of executives than the existing system.  But the counterargument to *that* is that the present pay caps are being driven more by populist rage than by any attempt to ascertain the intrinsic value of said executives.  That can be seen in the article Seedy posted.  The salary of the GM CEO is not being cut because he fucked up; the dude was hand-picked by Obama back only in the spring when Waggoner got thrown to the populist wolves.  What fucked up decisions has GM made since the spring?

Something that might or might not be relevant to this discussion: the average compensation of *all* employees at Goldman is 700K.

Man, where have you been for the last 12 months? The entire bail out business and saving companies that are "too big to fail" is socialism, pure and simple. There is no free market capitalism left in the finance markets at the moment.

Stopping now to complain about this not being a free market response is like stopping to complain about a slightly-too-revealing hemline in the middle of a full-blown orgy.

[Martinus]

Normally, I would be rather against the government telling companies what they can pay anyone, but fuck 'em, they decided to crawl into bed with the Feds to save their ass, well, what did they expect was going to happen? Of course the government is going to then start telling them what to do, who they can fire, what cars to make, blah, blah, blah.

I wish would would just kill them off now, rather than waiting.

I just with the DoJ drew up the proscription lists of all the bankers for the murder or robbery of whom people would not be prosecuted. That would be a nice republican solution that would not distort the market, imo.

[Martinus]

I disagree with that.

If I'm an executive in charge of a profitable division of AIG, and AIG goes bust in a spectacular manner without government intervention, there are two reasons I can expect to still get paid: 1) I'm an employee, and going to have priority over a lot of groups in a bankruptcy proceeding, and 2) My division probably has more value to creditors through a sale rather than a liquidation. If so, it is in the interest of creditors to keep paying key employees like me to maintain the value of the division.

Also, what you are saying may be a reason to void compensation agreements at the time of a bailout, but not when my pay is due. If I've done work after the bailout, the government is simply stiffing me for services I've provided. (this goes back to the AIG situation in March).

Ultimately--this is fairly academic. I don't think anyone still at these companies didn't know what the gig was months ago, and those who could found new places to work.

CEOs are not ordinary employees. I may be wrong, but I'd assume that their bonuses are also based on the overall performance of the company, and probably do not apply when it goes bust.

Also, wouldn't they be at least partially tied to some sort of share options? Again, such options would be worth nothing if the company went bust.

[alfred russel]

The question is - would these people in core operations get their bonuses if AIG imploded because of its insurance operations? If the answer is "no" then they shouldn't get their bonuses now.

I have no idea what you are trying to say.

Well I am saying that whether they should get bonuses or not should not be solely the question of whether they are responsible for the mess, but whether they would have got the bonuses absent of the bail out.

If the entire group would go bust and pay no bonuses if the government didn't bail it out with the tax payer money, then I don't see why people in the company should get a bonus paid out of the same tax payer money effectively, even if they themselves are not at blame.

I mean, many companies and firms (even those not going bust or getting tax payer money) have suspended bonus pay outs to all employees for the difficult times. It seems only fair that a company that exists only because the tax payers footed the bill did the same.

Do you extend that line of reasoning to vendors and other counterparties, or is it limited to employees?

[alfred russel]

CEOs are not ordinary employees. I may be wrong, but I'd assume that their bonuses are also based on the overall performance of the company, and probably do not apply when it goes bust.

Also, wouldn't they be at least partially tied to some sort of share options? Again, such options would be worth nothing if the company went bust.

We aren't talking about just CEOs.

[Admiral Yi]

Man, where have you been for the last 12 months? The entire bail out business and saving companies that are "too big to fail" is socialism, pure and simple. There is no free market capitalism left in the finance markets at the moment.

Stopping now to complain about this not being a free market response is like stopping to complain about a slightly-too-revealing hemline in the middle of a full-blown orgy.

Your comment should have been directed at Warspite, not me.

[viper37]

I disagree with that.

If I'm an executive in charge of a profitable division of AIG, and AIG goes bust in a spectacular manner without government intervention, there are two reasons I can expect to still get paid: 1) I'm an employee, and going to have priority over a lot of groups in a bankruptcy proceeding,

Only base salary as of yet unpaid.  Meaning you didn't get your paycheck last week and today the company is bankrupt.  You'll be part of the creditors, and will have to vote on a proposal (20-50% of what is owed to you).

and 2) My division probably has more value to creditors through a sale rather than a liquidation. If so, it is in the interest of creditors to keep paying key employees like me to maintain the value of the division.

They may not see it that way.  In fact, if they think you're good, they'll offer you a job elsewhere while someone else cleans the shit there.  You are an asset, they want you.  Why wait 1 year to recruit you if they can right now?
If they don't want you, you're stuck with the whole process or you are laid off immediatly.

Also, what you are saying may be a reason to void compensation agreements at the time of a bailout, but not when my pay is due. If I've done work after the bailout, the government is simply stiffing me for services I've provided. (this goes back to the AIG situation in March).

Nope.  They received bailout instead of going bankrupt.  Sure you did not vote on that.  But you probably did not vote on the things that made your company going bankrupt.

There must be a price for failure, otherwise no one learns.

[grumbler]

There must be a price for failure, otherwise no one learns Goldman-Sachs makes a fortune.

Fixed - though it is to be noted that GS is paying these bonuses out of its own profits, not bailout money (all of which it has already returned).

[alfred russel]

GM has already reduced Chief Executive Officer Fritz Henderson's 2009 pay by 27% from last year, to $1.26 million.

Chief Financial Officer Ray Young is to receive $720,000, or 15% less than in 2008.

The deepest cuts will come at the financial products division of AIG, according to the New York Times...No executive in that unit will receive more than $200,000 in total compensation, according to a person familiar with the plan. That's a stunning comedown for people who regularly made at least 50 times that.

We can quibble all we want about justice and fairness, but the pay amounts from the article are ridiculous. There are a lot of small cap companies with CEO pay over $1.26 million and CFO pay over $720k.

Maybe you can get some good people who want to make a mark on American industry at GM, but who are you going to get with a $200k annual cap on compensation at the financial products division of AIG? There are first years at investment banks straight out of MBA programs that make more than that.

[ulmont]

Maybe you can get some good people who want to make a mark on American industry at GM, but who are you going to get with a $200k annual cap on compensation at the financial products division of AIG? There are first years at investment banks straight out of MBA programs that make more than that.

I'm willing to bet you can find a lot of people willing to work for $200k.

[alfred russel]

Maybe you can get some good people who want to make a mark on American industry at GM, but who are you going to get with a $200k annual cap on compensation at the financial products division of AIG? There are first years at investment banks straight out of MBA programs that make more than that.

I'm willing to bet you can find a lot of people willing to work for $200k.

As would I--but those people aren't going to be qualified to run (or unwind) the financial products division of AIG.

[Zanza]

As would I--but those people aren't going to be qualified to run (or unwind) the financial products division of AIG.

The guys that ran it for "at least 50 times that" were not successful (and thus apparently not qualified) either so there does not seem to be an obvious relationship between high renumeration and qualification or success.

[Berkut]

As would I--but those people aren't going to be qualified to run (or unwind) the financial products division of AIG.

The guys that ran it for "at least 50 times that" were not successful (and thus apparently not qualified) either so there does not seem to be an obvious relationship between high renumeration and qualification or success.

That is like arguing that since planes crash when their are qualified pilots flying them due to their errors, we should just ahve some schmuck fly the planes, since clearly being qualified doesn't matter anyway.

[ulmont]

As would I--but those people aren't going to be qualified to run (or unwind) the financial products division of AIG.

Considering that Supreme Court Justices only get paid $208,100, I'm going to disagree with you here.

[Zanza]

That is like arguing that since planes crash when their are qualified pilots flying them due to their errors, we should just ahve some schmuck fly the planes, since clearly being qualified doesn't matter anyway.

No.

My point was that renumeration and qualification are not necessarily related. Not that qualification does not matter.

Following from that, I don't think that Alfred's point that you would not find someone qualified for $200k is correct.