Curbing CEO Pay

We want an America where hard-work, intelligence, and accepting responsibility get you ahead. I should add 'honest' before both the hard-work and the responsibility. But the Randian philosophy that CEO's, and especially banking CEO's, are earning their money because of those qualities, and that in so doing they are providing a useful service has been severely strained during the past year.

With apparently reckless abandon, the major banking institutions increased their risk exposure, and the system of CEO compensation not once put on the brakes as hoped. So, we all know the outcome: Men like Jamie Dimon, Lloyd Blankfien, Dick Fuld earned $100 of millions before the companies they ran went insolvent (oh, wait: They didn't actually have to declare bankruptcy, we bailed them out!) With no money back for our effort.

How can CEO pay be restructured so that it provides the proper incentives to the individuals running the show? How can it require longer term exposure, so that risky bets that pay short term (but may fail spectacularly later) are fully carried as a liability to the CEO, so that they have to wait for maturity also to get paid?

I've had some ideas, but I really like it when those more familiar with the financial system get involved. So I was particularly interested to read this open letter from Yves Smith (of naked capitalism) to Sheila Bair (Chairwomen, Federal Deposit Insurance Corporation). She starts out with some good observations, specifically that we (the communities) end up paying the excessive CEO pay without a good return:

Dear Chairman Bair,

America can no longer afford to have a banking system that serves the ends of its executives rather than those of taxpayers and communities who have been saddled with cost of reckless profit-seeking. The FDIC proposal to tie deposit insurance premiums to the incentives in executive compensation programs would be an important step forward towards making sure that bank managers operate in a way that reflects the value of the extensive government support and safety nets they enjoy. Bank officers should not be encouraged, as they are now, to take “heads I win, tails you lose” bets with deposits.

There is no question that the annual accounting/bonus cycle is badly out of line with the time horizon of many of the wagers that financial institutions take. Unfortunately, the belief that using stock options or restricted shares as an important part of compensation would lead to responsible behavior has proven wildly false. Both Bear Stearns and Lehman had substantial equity ownership at both the executive level and among the rank and file. By contrast, when Wall Street was dominated by private partnerships, so the management group was jointly and severally liable for losses, the sort of profligate risk-taking that took place in the run-up to the global financial crisis was virtually unheard of.

Along the way, Ms. Smith observes that 'every academic study' that she has seen on bank size is inversely correlated: Bigger banks do not gain an efficiency that allows them to run cheaper, contrarily, they have higher cost to asset ratios. But, it balloons executive pay (and the outgoing execs as the result of a merger are given hefty golden parachutes.)

And so to the meat of her request:

I strongly encourage the FDIC to remove the incentive for executives to bulk up their banks solely to pay themselves more. One way might be to require that executive bonuses be set in relationship to the pre-acquisition peer group for a substantial initial period (at least three years, better yet five) and be benchmarked against the new peer group of bigger banks only if the merged entity had met certain operational performance targets.

There's substantially more, plus a link to the current FDIC proposal, along with enlightened remarks by many readers at naked capitalism.

Let's face it: Any institution that has grown 'Too Big Too Fail' is really just too big to exist under our current scheme, for the monopolistic power it then holds over the entire economy suppresses advancement, both for individuals and society. If the incentives for executive pay give them incentives to grow their companies without regard to long term survivability or potential damage to other entities and communities, then those incentive structures are wrong.

Because our goal is a wealthy society, as much as possible free from the scourges of poverty, and because the means to achieve that goal have been to allow individual monetary enhancement does not mean that we can't curb individual takings when those takings prove disastrous to our goal. I'm heartened that there is finally some work being done - although this is only a first step, unless we can remove the spectre of 'Too Big Too Fail', we will always have to live with the threats of Deep Recessions or future Depressions.

Good Work, Yves!

On Bias

Tom Tancredo doesn't read my blog. Apparently, he should.

Although I've covered the subject of voting tests before, I think there's an additional point to be made – especially if someone in our government still thinks they are a good idea.

One of the difficulties that we face with our modern society is one of scale. There are so many people, with so much going on, that we realistically perceive only a slice of all that is occurring. If you are like me, you attempt to gather more information than just what's on the 5 o'clock news. But, if we're honest with ourselves, despite our sometimes voracious appetites for information, we're only gathering a subset. We don't know all the laws, all the interactions between the government and the population, all the intended and unintended consequences of those interactions.

And so, to a degree, we trust in the working of the institutions upon which our Constitutional Democracy is based. We trust that if the legislative branch passes a law that undermines our rights unduly, that would create inequality, or give too much power to groups rather than maintain it spread amongst all the people, that the executive branch would step in with its veto. If that doesn't happen, laws are challenged in court, and again, the judicial branch would rule against any law that doesn't comport with our ideals as set out in our Constitution.

One has to admit that it has worked fairly well. Despite the rather myopic understanding of personal freedom and democracy exhibited by our founding fathers, (John Adams ignoring his wife's pleas to “remember the ladies,” the 2/5ths clause concerning slavery, landowning requirements for voting), our institutions have endured, and in using them, participation in the process of democracy has been increased. Previously discriminated groups have had some of the most egregious discrimination lifted. Women no longer have to stay in poor, abusive, or violent marriages for financial reasons – they are recognized participants with rights to own and purchase property, work, and vote.

While it seems plausible that everyone should have some understanding of the workings and history of our government, since none of us can gather it all: Which subset is the important subset over which we should test? Does it really matter if someone can't name a single dead white guy who once held the office of president? If you've never had to go to court, and can't name the local judge, is your understanding of government deficient? If you can't recite the fifteenth amendment to the constitution in its entirety, trusting instead that those who study and practice law can, should you no longer able to participate in democracy?

Through my life's experiences, through the people I've met, the subjects I've studied, I find myself most interested in how we can build a society of equality. My empathy for those who don't start out with the gifts of money, my perception that groups too often wield unreasonable power, that a modern corporation resembles not our ideal of democracy but rather a feudal oligarchy lead me to study those aspects of government and its interactions that could redefine society and allow greater opportunities to all. Were I to design a voting test, through no intention, but due to the history and ideas that I find most compelling; if it were to impart a bias upon its takers, it would be a liberal bias that matches my own.

Tom Tancredo, by his own admission, recognizes that a test designed by him would naturally cover those subjects that he finds compelling, those subjects that would impart a conservative bias.

Only a very naive person would make the mistake of thinking that if only Mr. Tancredo and I could get together and jointly design a test that it would somehow be neutral. Although you could draw a line between my position and his, we are not just two points in a one-dimensional world. Rather, we are two points somewhere inside a three-dimensional box: There is no reason to believe that the midpoint of the line between us represents any meaningful position inside that box, that it's in any way close to the center, or that the center itself is meaningful.

All voting tests would represent the bias (or biases) of their author or authors. Since individual bias is built on impartial knowledge, and the only group that actually encompasses all knowledge is the complete group (all members of society), the only way to leverage all of society's knowledge is to allow all of its members to participate in the governing process. Any test, by its very nature, would eliminate those individuals who don't possess a specific subset, but there is no reason to suspect (or prove) that the knowledge they do have isn't valuable.

It's also one of the tenets of our democracy: No matter who you are, no matter where you came from, no matter the circumstances of your life, you have a right to participate in matters that concern you. Any exclusion of full participation creates an oligarchy – antithetic to our ideals.

So, let's put the ideas of voting tests behind us for good. Building an inclusive society is hard. But, in looking at the expansions in freedoms for individual members made over the last 200 years, surely it is rewarding and worthwhile.

Oh, The Irony!

Xenophobia is the fear of others.

In our society, xenophobia is most often expressed through our discrimination and distrust of those in groups other than the group with which we identify. Different ethnic backgrounds, different sexes, different religions, different educations are all means used to identify, group, and distrust, if not out-right discriminate.

During the Civil Rights movement, realization dawned that combating discrimination was more than just passing laws: It was also completely removing from our minds discriminatory attitudes. Our speech often reveals our underlying attitude, and pointing out discriminatory speech as an aid to recognizing hidden attitudes became acceptable. Ethnic jokes and put-downs revealed our inner thinking, and we became intolerant. Sexism and Racism entered our vocabulary, as did PC, or Political Correctness.

PC bites us all sometimes. That old family joke about that other ethnicity? No longer repeatable. Poking fun at someone dressed differently? No.

The aim is tolerance. Acceptance of the others that make up our varied society. Ultimately, inclusion – allowing every individual the same rights, responsibilities and freedoms that we would give ourselves and those in 'our' group.

There have been those who chafe under the new rules. They want to maintain the status quo. We often see this in their standing in the way of laws that prohibit discrimination. “Women shouldn't have the right to vote”. “Business should be able to choose those who aren't tattooed, pierced, or require modes of dress, etc.”

This defense of the status quo, this backlash against what they see as overreach into our individual attitudes as become identified with the Conservative movement. “Those darn liberals,” they cry, “taking away our ability to force people to look and talk and behave like us!”

So it was with great surprise last week that one of the most un-PC of the conservatives, one who has reveled in her very lack of correctness, should call someone out for uttering a discriminatory put-down. When Sarah Palin called out Rahm Emmanual for his transgression, she gave tacit approval to the idea that what we say reveals what we think – and that we should attack our discriminatory attitudes where they live.

But do you think the concept of reciprocity will enter her thinking? Do you think that she will realize that by extension, that discriminating against any other group is unacceptable? Will she, and other like-minded conservatives, realize that we still have far to go to admit all other groups into society as equal members?

Gays may soon be able to openly serve in our military. When will we give them the right to marry? Come on, Sarah. You've said the words against discrimination: Can you live up to their promise, and start supporting equality for all?