Tuesday, February 10, 2009

Even though government may have a philosophical right to do something, that doesn't mean it should

First of all, if anyone still reads this blog, I sincerely apologize for my very infrequent blogging. Part of the reason is just being busy at work. More importantly, however, is the birth of my baby girl Abigail. My wife and I no longer outnumber our kids; we have a family of 4 now.

Onto other stuff. I am a free market advocate, but I didn't have an immediate problem with the idea of capping CEO pay for banks that take bailout money. After all, if the government pays the bill, shouldn't it have some say in how the money is spent? From a philosophical standpoint, yes. (I should note that I completely oppose any current bailout or typically any financial assistance from government, though I could probably make an exception for events beyond control, i.e. airlines after 9/11) However, I started to think about it. Ideally, the government, and the people, would want the companies to get back on their feet. If paying a CEO a high salary is the way to do it, shouldn't we let the company do so?

This blog sums it up nicely.
Companies that take government assistance do so because they fear going bankrupt. Sometimes that is because they were badly managed by the CEOs and other executives in charge. What many of these companies need are new executives who can take a fresh look at their problems. Unfortunately, pay caps that leave total pay considerably below what able executives receive in other companies make it more difficult to attract these executives to companies in distress because they can earn more, and work with considerably less government interference, in companies that do not take or need aid. Moreover, severe limits on severance pay help to lock in incompetent executives who then might refuse to leave voluntarily because they would not receive any significant financial incentives to leave.
With high risk should come high reward. Why would a brilliant, qualified CEO take a position at a failing bank; where stability AND pay are low?

Hat tip to the Market Power Blog.

5 comments:

dolphin said...

Put simply, you can't just purchase talent and success.

If it were that simple, no bailout would be needed. In fact, if million dollar CEO salaries are de facto good investments, any company would be crazy to take any bailout money at all.

You say, "If paying a CEO a high salary is the way to do it, shouldn't we let the company do so?"

To which I reply absolutely. But if they already know how to be successful why do they need my money. The reality is that paying a CEO a high salary is very risky. High risk may reap high rewards, but it can also reap high loss. If I want my cash gambled away, I'll go to Vegas. Low risk, low reward is all that's necessary to get them back on their feet and once they are there they can take whatever risks they like with their own money.

Chance said...

"But if they already know how to be successful why do they need my money."

I think you make a very good point, and it is probably the biggest argument against letting companies do what they want - letting them do what they want is what got them into this mess. Of course, I take the whole approach of let them do what they want, but let them reap the consequences of their mistakes, but that's a whole other issue altogether.

"Put simply, you can't just purchase talent and success." True enough, but if millions doesn't necessarily purchase success, then $500K hardly will. In other words, a huge paycheck won't guarantee a great CEO, but a small paycheck will almost guarantee a bad one, or, at the very least, an inexperienced one, then you have a crap shoot.

However, you do make a point that a high salary does present a risk in itself, which is true. However, I'm not sure CEO salaries are that high compared to the overall gross of the company. It seems to me that the risk of an inexperienced CEO is greater than the risk of paying a guy too much.

But, this whole can of worms was opened with the existence of the bailout in the first place. I think a free market can only work if people face the consequences of their decisions, to some degree.

dolphin said...

a small paycheck will almost guarantee a bad one, or, at the very least, an inexperienced one, then you have a crap shoot.

But who are we losing these excellent CEOs to exactly? If a company is managing to be successful in these economic condition, I doubt they're looking to change out CEOs anytime soon. And with the market where it is, I bet few multi-millionaire CEOs are looking to retire just yet.

For a CEO right now, I don't really think it's a choice between a high paycheck and a "low" paycheck (oh were it that MY paycheck were so low!), but more likely between whatever paycheck they can get and NO paycheck. $500 grand beats $0 any day of the week.

I'm really sympathetic to the argument against the bailout altogether. I certainly don't mind seeing folks taking the fall for their own poor decisions. My concern has been whether I should also have to take that fall for THEIR bad decisions.

I have little doubt in the effectiveness of a wide-open free market. The free market is effective but effective with a coldness that I can't justify. I fully believe that left to the free market alone, some shining new stars would rise from the ruins after our economy collapsed, but the human suffering that would go on in the meantime (and indeed after) is what's unacceptable to me.

Chance said...

"My concern has been whether I should also have to take that fall for THEIR bad decisions."

Makes sense, but why not help those at the bottom of the ladder instead of those at the top? Why is "trickle-down" economics a bad thing when talking about the free market, but when talking about the bailout, it's a good thing?

dolphin said...

To be clear, there's nothing "good" about the bailout. I'm strongly inclined to oppose it except that the only other option that's been proposed is to do nothing.

I don't think the bailout amounts to "trickle-down" economics though. The bail out funds are unlikely to trickle-down. What they MIGHT do is hold off a total collapse until such time as the "trickle-up" measures in the stimulus bill can begin to take effect. Some of us believe the best way to stimulate an economy is to put more money in the pockets of the average consumer and some of believe that the best way is to put more money in the pockets of the extremely wealthy, but I think we all agree that neither side can be allowed to complete implode.