Re: Weaving the Strands: Business, Economics, and Tax Policy 2.0
The stupid part comes in when you (along with the article's author) draw the wrong conclusion. ... the Sarbanes-Oxley Act basically put a cap on executive pay from salary at $1 million per year unless it was ["]performance based["]. If you notice, executive pay started to increase just after that limit was imposed.
Another stupid part (on the part of the staff members of Messrs Sarbanes and Oxley (I surmise that neither Congressman actually wrote much of the bill, they merely co-sponsored it) was allowing "performance-based" to be defined by the people whose performance is being measured.
More on this later....basically, the contrapositive of what I said earlier, in that I do have to agree with something Scooby would say if he had sense enough to notice!
There are two different and connected problems.
1) most employees are not offered incentive pay commensurate to the incremental value they can create to the company. This is so screwed up in so many ways, I hope it is obvious enough to all as to require no further explication.
2) the ratio of incentive pay to base pay for senior executives is out of line. In other words, I do believe that reported pay for senior executives is indeed somewhat disproportionate to the incremental value that they do create, and in this way Scooby and I are in total agreement.
-- part of the problem is the Sarbanes - Oxley limit: most executives would probably prefer to have a somewhat higher salary and less stock options if they were allowed to. The unintended consequences of the $1 million cap is that the rest of the total package became riskier, and any rational human would prefer more certainty to more risk. If you contrain certainty by an arbitrary limit, you shift more to risk, and simply because it is risk it demands a higher premium.
-- part of the problem is Quantitative Easing. What a disaster! Collective hallucinations. Stock prices have been artificially pumped higher by Ben and the Expansioneers, as they print trillions of dollars of paper money to prevent nominal adjustments in market prices (i.e., the Fed is indirectly buying real estate and stocks in a roundabout manner through QE, and stock prices are insane but there is nothing else to do with all the cash the Fed is pumping out).
-- so the law forced executives to take on more risk, and then government policy artificially and capriciously rewarded one segment of the economy at the expense of the rest of us (the opportunity cost of interest foregone on savings accounts and bond portfolios is staggering, hundreds of thousands of frugal people who really did work hard for decades and depended upon a steady 4% interest on their certificates of deposit...all that interest they could have earned in "normal" times, deliberately transferred away from them to prop up financial institutions). that is something to be angry about, to be sure, but the executives didn't do this, they merely went along for the ride...
-- the executives negotiate with the Board over what constitutes "performance-based" in the first place? C'mon, folks. Whatever target you give them, they will do their dammedest to hit. With the wrong incentives....too many people are rewarded by the change in share price when the better measure would be the incremental change in share price above a given baseline. that at least would reduce the payout from inflated stock prices in boom times, and also would reduce the executive's risk premium in down times (if you are rewarded based on performance above a baseline, and
everyone has a bad year, you can still come out ahead even if your stock price is down).
So in short, while executives do deserve
some incentive pay, the amount of incentive pay they do receive is disproportionate to the incremental value they do create (translation: "they are only somewhat overpaid, but not grossly overpaid").
Regular employees also do deserve some incentive pay. Suppose everyone who worked at walmart recevied 10 shares of stock for every year they worked there...suppose every kid who ever had a minimum wage job at McDonalds also got 5 shares if they worked there long enough and well enough....all of those folks would be thousands or tens of thousands of dollars better off than they are now.
