CdM's red post for the day

[DGuller]

CEO pay is not always linked to company profitability, for a variety of rather obvious reasons.

CEO comp should be reasonably connected to performance.  The bottom line is the bottom line with respect to performance.

Maybe in the long term, but not in the short term (and taxes reflect short term).  CEOs should be rewarded based on how well they perform given the circumstances, not based on how good the circumstances are.

[The Minsky Moment]

Maybe in the long term, but not in the short term (and taxes reflect short term).  CEOs should be rewarded based on how well they perform given the circumstances, not based on how good the circumstances are.

yes I've heard that line to explain why CEO X gets paid a huge chunk despite losses, on the theory that industry conditions are terrible.
But when industry conditions are flush, does the CEO's pay get cut when the company is up 15% on the year but the industry is up 20%?  That rarely seems to happen

[DGuller]

Maybe in the long term, but not in the short term (and taxes reflect short term).  CEOs should be rewarded based on how well they perform given the circumstances, not based on how good the circumstances are.

yes I've heard that line to explain why CEO X gets paid a huge chunk despite losses, on the theory that industry conditions are terrible.
But when industry conditions are flush, does the CEO's pay get cut when the company is up 15% on the year but the industry is up 20%?  That rarely seems to happen

Of course all evaluations of that nature have to work both ways.  However, I think the idiocy of cutting the pay of the CEO that keeps his ship afloat with minimal losses while everyone else is falling by the wayside is so obvious that the focus should be on fixing the overpayment during the good times, and not on giving up trying to separate the skill from luck.

[The Minsky Moment]

Of course all evaluations of that nature have to work both ways.

But the problem is, they don't.
And that gets at a underlying problem, which is that the market for top officers for large public companies is dysfunctional, arguably not a proper market at all.  The process of retaining and compensating CEO's is plagued by glaring principal-agent problems.

and not on giving up trying to separate the skill from luck

But where is the analysis that attempts to do that in any real way?  How many comp committees take a rigorous look at the real economic contributions of their CEOs, as measured against the best available alternative?  Many big companies that measure the economic contribution of line workers with exacting precision do little to obtain the same information on the guy at the top of pay scale.

[Razgovory]

Why not instead of giving him a lump sum at the end of his employment, just pay him a wage based on how the company is doing after he left.  If the company does well for the next 20 years, he keeps getting a nice salary for 20 years.  If it kicks the bucket a week after he leaves, he gets nothing.

[Berkut]

CEO pay is not always linked to company profitability, for a variety of rather obvious reasons.

CEO comp should be reasonably connected to performance.  The bottom line is the bottom line with respect to performance.

While that is generally true, it is not specifically true at all.

Hence there could be many instances where a company does not make much money, or even loses money, and the CEO would still get paid.

Sometimes they may even get paid very well, the "bottom line" notwithstanding.

[The Minsky Moment]

While that is generally true, it is not specifically true at all.

Hence there could be many instances where a company does not make much money, or even loses money, and the CEO would still get paid.

Sometimes they may even get paid very well, the "bottom line" notwithstanding.

Description is not prescription.

[crazy canuck]

CEO pay is not always linked to company profitability, for a variety of rather obvious reasons.

Not only is it not always the case, these days it seems to be rarely the case which is JR's point.

[Admiral Yi]

I imagine there was a time when progressives would have been ashamed of intellectual dishonesty.

If they're concerned about income distribution, by all mean they should make that case (and there are several good arguments in their favor).  But don't pretend it has anything to do with the financial crisis.

If they think corporations should pay more taxes, by all means make that case, but don't pretend Boeing only paid $13 million in federal taxes in 2010.

Lying to further a cause you believe is righteous is still lying.

[Razgovory]

You listening to Glen Beck now Yi?

[DGuller]

If they're concerned about income distribution, by all mean they should make that case (and there are several good arguments in their favor).  But don't pretend it has anything to do with the financial crisis.

There is no need to pretend.  There is a connection between the casino mentality, and the rising income inequality.  When a hedge fund manager is paid 20% of profits when the fund is up, and pays 0% of losses when it's down, there is an enormous incentive to both ratchet up the risk, as well as throw caution to the wind in general.  Multiply that by hundreds, and you've got quite a combustible situation.

[Admiral Yi]

You listening to Glen Beck now Yi?

No.

[Admiral Yi]

There is no need to pretend.  There is a connection between the casino mentality, and the rising income inequality.  When a hedge fund manager is paid 20% of profits when the fund is up, and pays 0% of losses when it's down, there is an enormous incentive to both ratchet up the risk, as well as throw caution to the wind in general.  Multiply that by hundreds, and you've got quite a combustible situation.

What is the connection between hedge funds ratchetting up risk/throwing caution to the wind in general, and the subprime meltdown?

[DGuller]

There is no need to pretend.  There is a connection between the casino mentality, and the rising income inequality.  When a hedge fund manager is paid 20% of profits when the fund is up, and pays 0% of losses when it's down, there is an enormous incentive to both ratchet up the risk, as well as throw caution to the wind in general.  Multiply that by hundreds, and you've got quite a combustible situation.

What is the connection between hedge funds ratchetting up risk/throwing caution to the wind in general, and the subprime meltdown?

Because subprime meltdown was really not a subprime meltdown, but rather a grossly over-leveradged financial system meltdown?

[Admiral Yi]

Because subprime meltdown was really not a subprime meltdown, but rather a grossly over-leveradged financial system meltdown?

Which hedge fund (or funds) created counterparty risk sufficient to endanger the financial system?  Which were bailed out?