Executive Compensation

The Globe & Mail published their most bone-headed editorial ever this week. The logic was so assinine that I wonder if they were trying to undermine their own argument.

It went like this: People are concerned about executive compensation. That concern was justified when CEOs didn't, on average, make less bucks last year after share prices fell - so people are saying there's not enough of a link between pay and performance. But wait! "The good news" the Globe says, "is that such a link is becoming the holy grail of compensation design."

At which point thoughtful readers everywhere started thinking: Well that's not right. Canadian CEOs weren't responsible for the biggest financial crisis ever to strike the five inner planets. When crisis hits, do we not need the best CEOs we can get to protect us? Performance metrics are a pretty sucky idea.

Of course performance metrics are just one aspesct of a huge issue of behavior so unethical it should have serious jail time attached. The Globe might have mentioned that fifty years ago, CEOs made 20 times what frontline employees made while today they make 300 times frontline wages. They might have cited the growing cries to create some legal protection for shareholders and employees, say by reducing the ability of the guys at the top to remunerate themselves, or by putting firm limits on how much they can suck the corporations dry... viz a maximum wage. Noone would expect the Globe to say that as long as the CEO-director cabal continues to run major corporations as a giant cookie jar for their own super-sized enrichment, we're not living in capitalism but just a corrupt oligarchy... but it seems rather pertinent too.

I'm not saying there's anything wrong with making $919M in one year, like the CEO of Och-Ziff Capital Management. There are situations in which making a bundle is perfectly ethical. For example, if I were ever to publish my collection of poems about bi-valve evolution, it would of course sell many copies and I would become very wealthy. If I got $2 per book in royalties, I might make, what... about $200 million in the first year. (I'm not completely acquainted with the income of poets but it's something like that.) I don't think there's any issue of unfairness in that income - after all it's volume that caused the figure to be so high.

But the incestuous little community of CEOs and directors, who set their own remuneration levels and move from company to company scratching each other's backs, is hoovering up vaster and vaster percentages of profit purely because they have the power, balls and lack of shame to allow them to grab other people's money. I'm not saying that they aren't qualified or that they shouldn't be well compensated, just that (1) they shouldn't have the nearly-unfettered ability to take as much as they like and (2) no-one deserves labor income in excess of $100,000 a week.

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Antilibertarianism

The recent financial crisis delivered a death blow to the ideology of free market capitalism that reigned for the last 25 years. But are we thinking seriously enough about what dismissing it means? There are wider implications than regulatory reform.

In the Reaganite positioning, big government was bad. Supplying social services was called "tax and spend," which was equated with waste and corruption. That was just spin of course: a major function of government is necessarily the provisioning of social services. On a micro level we could think of a condominium building: if the condo association decided to collect no condo fees and provide no services, then the snow wouldn't be plowed from the driveway and the hallways wouldn't be vacuumed; the leak in the roof wouldn't get fixed; the legal requirements of the association wouldn't be met.

Throughout the last 25 years we have had a trend of government cut-backs that have been not only harmful to our well-being, but also inefficient and costly. We need to rethink government's role in providing services: ideally, we need a new philosophy for the role of the state. It's not a trivial activity and presents some major challenges. I'm not just thinking of the need for prioritizing, but also the need to rethink the government's relationship with civil service unions; devise a public credo that provides for a more equitable sense of government handouts; figure out how to handle the retiring baby boom generation; and so on. We need to change the debate to a more realistic understanding than the old neo-con slash approach: use cost-benefit analysis to show the real cost of not spending money in some cases, such as reducing money for preventative health care or the training of doctors. And so on: I don't think I've probably even skimmed the main issues.

The US has a visionary president now, but Canada can't rely on him to create a conceptual approach to this post-Libertarian era because the US has a much more limited view of social services than Canadians do. Stephen Harper is obviously not going to provide that kind of vision: he's an old-order neo-con. But Michael Ignatieff might be the perfect person for the job, with the intellectual depth and the visionary perspective necessary to forge something new and appropriate for Canada.

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The Rich Use Taxpayer Money to Further Enrich Themselves - As Usual

US President Obama's Chief Economic Advisor Larry Summers on This Morning with George Stephanopoulos today, commenting on AIG paying out $165M in employee bonuses this week ($450M total) after being given $170B in federal bailouts:

"We are a country of law. There are contracts. The government cannot just abrogate contracts."

Will the government adopt the same stance when demanding that auto workers accept cuts to remuneration? In that case, there seems to be a whole different attitude: accept reductions to pay and benefits or you can't expect to keep your job. There are even demands for cuts to payments to auto union pensioners.

If you're going to force auto workers to accept pay cuts for relatively minor bailouts you sure as hell better force financial institutions to accept pay cuts.

To put the bailout in perspective, US taxpayers are paying on average over $1,000 in 2008 - just to bail out AIG. And it's just one of dozens of financial institutions being bailed out. The bailout to the auto industry is going to be something like one 10th of just the AIG amount.

I see the justification in the auto industry negotiations: the auto industry is not profitable, and so costs have to be reduced to make it a sustainable industry. Has the financial industry somehow not been judged in the same way?

Most of the AIG bonuses go to the Financial Products Division, the group that ruined AIG. In the last three months of 2008, AIG lost $62B - the largest losss of any company ever. Some individual bonuses are as large as $6M. The company argues that the average bonus is only $19,000, but you can manipulate the average: the key thing is the top amounts. Plus, the company claims that if they aren't paid people will quit, but really: in today's economy, where will they go? You might argue that they'll sue: well pass a law.

The bonus issue is just part of the scandal at AIG. There are also troubling questions about counterparty payouts: while a company in distress might have forced counterparties to take a cut on payouts (especially since a lot of the transactions were highly speculative), AIG used federal bailout funds to voluntarily pay 100% - and is now resisting efforts to provide a list of who was paid. Again, it seems like the rich and powerful are using government bailouts to transfer money among themselves.

You might argue that it's all about power. AIG is too big to fail so the government's hands are tied. Baloney. The government now owns 80% of AIG. The government has all sorts of options up to and including taking control of the company, sending people to jail, and levying massive fines.

I'm not blaming Obama for this; he has a whole lot better take on this than his opposition. This is just the way the system works. It's a mindset: a paradigm that needs to be broken and replaced with something more equitable. It's doubtful it will ever change. Everyone's mad about this but nobody's mad enough.

Update: Counterparty payments released

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Tweaking the System

The other day I was talking to a friend about the ways that capitalism might evolve to become something that benefits more people. It's one of those topics that doesn't get near enough public discussion.

I have never done sufficient research on the topic, but I know that some thinkers have defined our current system as shareholder capitalism and have argued that we should move to a system of stakeholder capitalism that involves collective ownership, profit-sharing, a cooperative labor process, and guaranteed incomes. Some people propose that we move to a system of economic democracy with socialized markets and employee-managed work.

My mind tends to run to less grandiose, more bandaid-type solutions: We need more regulations, better enforcement, and tax reform. (For two of my earlier posts about this, see In Praise of Regulation and Employee Protection.)

When playing around with ways that capitalism could change, it's interesting to think of the outcomes we would like to achieve. Economic growth and prosperity, for sure. High productivity. Less poverty. Environmental improvements. But what about the ways our system shapes us: the sorts of people who are rewarded, and the sorts of people who are marginalized. For example, in our current system, arrogant, ambitious men tend to be the most successful, regardless of their relative qualifications or benefit to the organization. It's a pipe dream I guess, but it would be nice to think that one day the system wouldn't tip in their favor.

Anyway, on to ways we could change the system...

Income redistribution
Tax reform is an important part of improving our system. Currently, the highest tax bracket in Canada is $120,888 to infinity, and the marginal tax rate is 46.4%. The next lower tax bracket is $74,358 to $120,887, and it is nearly the same rate (43%), so you could say that everyone over $74K is in about the same tax bracket. People who make $15,099 pay 22%. These tax rates hardly meet the goals of progressive taxation. We need lower rates for low income, and we need tax brackets over $120K that get progressively higher. (Remember that rich people pay tax on only 50% of their income from capital gains and that they have other loopholes like trust funds.)

Labor
One part of moving to a more enlightened form of capitalism is to move to more enlightened corporate environments: places that have more respect for their workforce and operate less to make the top six executives richer than Croesus. The odd company may become more enlightened (probably due to employee ownership) but it won't be the norm without regulation and public education to support the movement.

Markets
We need much more heavily regulated markets to protect citizens from pollution, the exhaustion of resources, fraud, inflated prices, and so on. Think of it this way: one of the most highly regulated markets in the world is the financial market. The people who are most involved in the financial market tend to be pro-free market, anti-regulation... except when it comes to protecting their money. In the same way, we need to protect the health and prosperity of all citizens.

How to get it done
I know, I know, usually at this point is a posting I invoke the name Bob Rae and do a little hand-wringing about what-might-have-been. But really, none of this will ever happen unless the electorate demands it. I wish I understood how the French did it.

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