LeBron, Obama and Executive Pay

Nah. This isn’t going to be a rant about the relative worth of what people make and what they do. If the Cleveland Cavaliers (or subsequently New York Knicks) want to pay LeBron James a billion dollars a year while starting high school teachers make around $35,000, so be it. The NBA has a salary cap and until the league goes belly up and applies for TARP funds — the players should go for it!

That’s really what happened on Wall Street. We created and nurtured a culture where everyone wanted to go for it — no holds barred. So it’s interesting to me that Obama is going to put the screws on executive compensation, capping cash payments to the Wizards and Chiefs at firms that are wards of the U.S. taxpayers. Here’s from a New York Times article by Stephen Labaton and Vikas Bajaj:

In announcing executive pay limits on Wednesday, President Obama is trying to hold the financial industry accountable to taxpayers while aiming to change an entrenched corporate culture that endorses outsize bonuses and perks that often bear little relationship to corporate performance.

Mr. Obama also needs to deflect a growing populist outrage over sky-high pay among the banks and other companies now on the public dole. His announcement comes just days before the administration is expected to unveil a new strategy — and possibly request more money from Congress — to guarantee or buy outright hundreds of billions of dollars in bad assets held by banks.

The new rules would set a $500,000 cap on cash compensation for the most senior executives, curtail severance pay when top executives left a company, restrict cashing in on stock incentives until government assistance was repaid and prod corporate boards to closely scrutinize luxury perquisites like private jets and country club memberships.

It’s symbolic, of course. But necessary because of the legitimate outrage people have by the greed, irresponsibility and just plain management abuse exhibited by the Wizards and others. Ever have a performance review where you work? How would you like to see those descriptors attached to your name and job performance. Bonus anyone?

But the reality is that this cap on executive cash compensation is not going to change the culture on Wall Street. People don’t spend their lives there in a cubicle looking at the upticks of bond prices because they think they are contributing to the public good. It’s about the money, stupid. And the more the better.

For a really insightful analysis of this Wall Street culture, take a look at Joe Nocera’s NYT column, “It’s Not the Bonus Money. It’s the Principle.” He writes:

Wall Street traders are also extremely reluctant to give up the “eat what you kill” mentality that has dominated their profession these past two decades. There is no sense of shared enterprise at most firms, and no belief among the rank and file that they should have to pay a price if the firm is drowning in losses and needs government support. That is why they are so blind to how they appear to the rest of us. They just want theirs. That is the culture they have created.

Indeed, Ira Kay, a top executive consultant with Watson Wyatt, told me that this bonus season has been akin to “war” inside many Wall Street firms. “It is a small group of people who caused the problems,” he said. But other bankers had very good years — and all over New York they are now complaining about their smaller bonuses, completely tone-deaf to how this sounds outside their Wall Street silos. You can make a pretty convincing argument that that culture — and the bonuses that flowed from it — had a lot to do with creating the financial crisis. If Wall Street can’t bring itself to admit as much, the new administration and the Democratic Congress are going to be more than happy to point it out.

Still, Obama had to do something. And you can argue that capping executive pay will provide some stimulus to at least some firms. For instance, you can almost hear the firm alarm sounding at the large compensation and benefits firms like Watson Wyatt, Hewett and so on. There is nothing that gives them greater pleasure — and I expect fees — than figuring out creative ways around restrictions on executive pay.

Here’s from an Associated Press story as printed in The Huffington Post:

Executive pay consultants say firms are sure to seek ways to get around the new rules anyway.

That’s what happened in 1993, when Congress limited the corporate tax deduction on executive pay to $1 million. That move fed the boom in stock option grants, which weren’t subject to the limits.

And the new rules would still allow big restricted stock awards _ they’d just postpone the payoff. So executives could still walk away with big money if their firms eventually repaid the government.

“There’s plenty of wiggle room,” said David Schmidt, a senior consultant on executive pay at James F. Reda & Associates. “There’s no constraints below the senior executive level, so the question becomes, will the restrictions trickle down?”

And there is a reality beyond the public anger to all of this as well. There are plenty — thousands? — of people on Wall Street who make well beyond $500,000 a year. They aren’t going to stay at a firm where their compensation wings are clipped. They will most likely, given the opportunity, jump ship and head to the firms like Goldman Sachs that are not as yet wards of U.S. taxpayers. And that will have a tendency to weaken the firms even more that are in the worst shape right now. So it goes. As reported in USA Today:

One risk of the plan is putting the survival of firms at risk by handcuffing their ability to pay top performers, says compensation consultant Alan Johnson. Some fear executives at banks who take TARP money will go to banks with no pay restrictions.

“The unintended consequence is you end up killing the institution you tried to save,” says Johnson. “You drive away the good people.

And then there is LeBron. He was in New York last night for another job audition at the Garden. And the Knicks played ball and let him score 52 points — while George Vecsey’s column proclaims, “James Embraces Garden’s Legacy.”

Oh boy.

TARP anyone?

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2 responses to “LeBron, Obama and Executive Pay

  1. I’m enough of a capitalist to wince at heavy-handed government intervention, but the folks on Wall St. did bring it on themselves. And since we’re bailing their sorry asses out, we should be able to dictate some terms.

    Ethics writer Rush Kidder reminds readers that when ethics and responsibility break down, they are replaced by laws and regulations. Put another way, if you won’t do right voluntarily, we will legislate it.

    Will the bankers find alternatives to cash compensation? Of course they will. Remember “soft money” political contributions? If there’s a loophole, the snakes will always crawl through it.

    Sadly, most of us have lost faith that business or government will ever do the right thing. And restoring that faith, as you have pointed out here in the past, is the President’s primary challenge.

    It’s depressing, but I’m stockpiling bourbon to ease the pain.

    • Yeah. What we really need is for the Wizards and others to develop an ethical backbone and stand up and do the right thing. I guess they don’t teach that in business classes.

      And since there hasn’t been much evidence of that happening, your strategy of stockpiling bourbon is the best one by far. The way things are going, that’s probably the only industry in the USA that won’t require a bailout.

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