Feb

5

Salary Caps, from Duncan Coker

February 5, 2009 |

10 Comments so far

1. Dan Costin on February 5, 2009 11:55 am

   Talking about Jon Stewart, did anyone catch his love-fest with Lawrence Lindsey? Stewart has some pretty crazy populist ideas, conflating lending with giving (don’t give the money to the banks, give it to the people!). Stunningly, he was happy to receive validation of his theories from a member of the administration that clearly failed to understand what’s going on.

2. Dan on February 5, 2009 12:48 pm

   There is an easy way around the salary caps and that is restricted stock. From Bloomberg, “Any additional compensation will be in restricted stock that won’t vest until taxpayers have been paid back, according to an administration official, who requested anonymity.”

   Most banks would benefit from less egregiously compensated ‘talent’

3. Gary Rogan on February 5, 2009 3:00 pm

   While I’m not at all a fan of the government first “saving” some chosen few and then dictating to them how to run their business, there does seem to be a fundamental flaw in the variety of compensations schemes for the top executives as well as the sales forces and other exempt personnel of large US corporations: various metrics are often developed that can result in asymmetrical (do well and you win big, screw up and your losses are limited) compensation based on positive yearly and quarterly results, yet the damage from some of the decisions that led to these good results in the short term often takes years to develop. If you look at the “credit crisis”, the Internet boom, and the various banking collapses throughout history as well as individual “looting” episodes at different companies, they are often partially caused by somebody gaming the system to result in huge short-term accounting gains for engaging in activity that has long-term negative economic value.

4. Rocky Humbert on February 5, 2009 7:01 pm

   Duncan is 100% correct. Any self respecting economist will agree with his analysis. Reasonable people may, however, debate about whether this is in “the public interest.”

   I’d argue that troubling issue here is that of the “slippery slope.”

   As I argue in my blog today “Why A-Rod should care about Obama’s Pay Cap” http://onehonestman.wordpress.com/2009/02/05/a-rod-should-care-about-obamas-pay-cap/
   once these sorts of policies become acceptable, the wave of populism can spread through the economy — in unexpected ways.

   Then, once the country gets used to this sort of intrusion, it’s not that difficult to foresee 99% marginal tax rates for executives and corporations in industries with “externalities” (i.e. tobacco, coal, gambling).

   Not a pretty picture for a capitalist.

5. Adam Kretschmann on February 5, 2009 9:15 pm

   Isn’t the “shortages of talent” argument a canard? Every major sports league (okay except mlb) has a cap and nobody is trying to argue that we aren’t seeing the best athletes in the world night after night…

6. Rocky Humbert on February 6, 2009 8:43 am

   Adam:

   Interesting point. However based on my limited understanding of the mechanics of the sports caps, one needs to consider the raisson d’etre of the caps:
   1) The caps are actually for the team as a whole and not for individual players. Hence a single player is not capped — so you could have one player earn a zillion dollars, and the rest of the team earns pennies. So the incentive to be that one superstar remains in place — attracting talent. [Wall Street generally pays 50%ish of revenues in compensation, with the top few producers getting a disparate percentage of compensation. So I think my analogy holds.]

   2) A motivation behind the caps is really revenue sharing, so a team with a small audience can compete for talent with a team that has high revenues. If every game had the score 100 to 0, the sport would quickly lose viewers and die. In contrast, if every game is too-close-to-call, then that increases interest and revenues. So cap proponents argue that the cap actually increases revenues for the industry. I don’t see a Wall St analogy here.

   3) Lastly, one could argue that the caps are really a collusive attempt by team owners to keep the cost of their labor low, and increse profits. I don’t want to get into that complex debate.

   The bottom line is that ANYTIME a tax is put on something, you get less of that something. If you tax cars, you’ll get less cars. If you tax labor, you’ll get less labor. If you tax cigarettes, you’ll get less cigarettes. If you tax baseball players, you’ll get less baseball players. The Obama proposal is effectively a marginal 100% income tax…which only affect certain distressed institutions. I don’t think ANY economist will disagree with this analysis. The debate will be on the supply/demand curve effect and on whether the desired outcome is in the “public interest.” [ The only exception to this universal rule is the estate tax … because if you could tax death, and have less death, it would be mighty nice. ]

7. Russell Sears on February 6, 2009 9:59 am

   The way around this cap is to become a consultant and invest in consultants rather than executives.
   This will make banking using the “lawyer/client” model.
   I have some thoughts, but will leave it to the reader as an excercise to figure out how this will effect the industry and the economy.

8. Steve on February 6, 2009 10:11 am

   “Shortage of talent” interesting argument. Question what is shortage of talent. Follow-up on talent how is shortage of talent measured. The former head of Home Depot Mr. Nardelli drives that company down, leaves and goes over to Chrysler. When he left HD did they immediately have a shortage of talent. Over 1000 CEO’s left their companies last year for other ventures and opportunities. Did 1000 companies suffer from a shortage of talent? what is wrong with this picture.

   Sports analogy. Philadelphia Eagle fan 3 years back. We need T.O. to win us a Super Bowl. Miami Dolphins had a shortage of talent and went 1-15 next year they go 11-5 where did all of this miraculous talent come from in the off-season. Chicago Bears went 13-3 onto the Super Bowl and next year ummented to miss the playoffs. Where did all the talent go in the off-season. Dallas Cowboys were laden with “talent” last few years have not won a playoff game. This is one reason why sports talk radio is so popular. It fills the airwaves we jibber-jabber.

   Next, a banker wants to leave a company where is he/she going to go to get a juicy compensation package. Hell Citigroup is trying to negotiate out of paying $20 Million a year for naming rights for the Mets stadium. They are going to step up and give a runaway executive a huge comp package? No I am sorry this time it is different. Said executive learns like Wall Street analysts in a bear market nobody wants you and in a Bull Market nobody needs you.

9. Gary Rogan on February 6, 2009 5:00 pm

   Some day there may be a movie about this. I propose “The Fedfather”. There could be many memorable scenes, like bank executives being given a choice between salary caps and their kneecaps. Or Ken Lewis given an offer to go through with the Merrill purchase he couldn’t refuse. Or those same executives taking a helicopter ride with sacks of $100 bills to distribute to the masses after refusing to lend TARP money but accidentally hitting a black swan and landing in the Hudson, and how the helicopter didn’t float at all even though captain Sally did all she could. You’ll laugh (about the silly executives thinking they could earn whatever they wanted) you’ll cry (about losing the sacks of $100 bills and the country), but good time will be had by all.

10. Rocky Humbert on February 6, 2009 6:19 pm

    Steve:

    In poker parlance, “I’ll see your Nardelli example and raise you,” with Ed Zander (formerly of Motorola). Here’s Zander’s resume: (1) Data General (2) Apollo Computer (3) Sun Microsystems (4) Sunsoft (5) Motorola. He managed to destroy five companies over the course of his career, yet he kept moving up the ladder at bigger and bigger companies. Likewise, I keep reading about fund managers who lost billions of dollars, launching new funds. One could write books about the American culture, and why after failures, people get second, third, fourth chances….and whether it is a good or bad thing. But that’s a different discussion.

    I think one needs to distinguish between a shortage of talent, and the general principle that when more people compete for a job (or anything else), the outcome is superior (in general), than when less people compete. It’s really no different from bidding on the town’s garbage hauling contract. More bids, the better the result.

    I am NOT arguing that the highest paid athletes/teams win the most. Rather, I challenge you to argue explicity that there is no supply/demand curve for football players. And no supply/demand curve for doctors and bankers and lawyers. (I’ll accept that other variables besides $$ affect the supply curve e.g. status, purpose, satisfaction, etc), but at the end of the day, there is a supply/demand curve for EVERYTHING. And when price is artificially lowered, supply will decline. And when supply is lowered, fewer people will compete for the jobs.

    This time is NOT different. The Laws of Economics and Darwin predate this crisis by quite a few years. The consequences of the government’s actions, both now and 10 years ago(CRA, etc) are quite predictable, and will manifest themselves for years to come….