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Going Galt
The Obama administration orders huge pay cuts:
Under the plan, which will be announced in the next few days by the Treasury Department, the seven companies that received the most assistance will have to cut the cash payouts to their 25 best-paid executives by an average of about 90 percent from last year. For many of the executives, the cash they would have received will be replaced by stock that they will be restricted from selling immediately.
And for the 25 best-paid executives, the total compensation, which includes bonuses, will drop, on average, by about 50 percent.
The companies are Citigroup, Bank of America, the American International Group, General Motors, Chrysler and the financing arms of the two automakers.
There is no way this will work as advertised. If the administration actually follows through, most of these executives will quit and get higher paying jobs elsewhere. Executives not directly affected by the pay cuts will also quit when they see their prospects for future salary gains have been cut. Chaos will be created at these firms as top people leave in droves. Will the administration then order people back to work?
Addendum: Larry Ribstein has an excellent post on this issue and see Max Fisher for an interesting explanation of the timing and a good roundup.
Posted by Alex Tabarrok on October 21, 2009 at 05:35 PM in Current Affairs, Economics | Permalink
Comments
>>Will the administration then order people back to work? >>
Why would you want to order back to work people who lost billions of dollars and nearly destroyed the economy?
Posted by: fusion at Oct 21, 2009 5:43:48 PM
This seems like a testable prediction to me.
Posted by: Trey at Oct 21, 2009 5:45:52 PM
If there is a large market for incompetent executives, you could be right. Even so, I'm not sure it would hurt the companies much, as I am sure there are other incompetent executives available.
Posted by: matt wilbert at Oct 21, 2009 5:47:22 PM
...and they will call the order "Directive 10-289"
Posted by: Scott Wentland at Oct 21, 2009 5:54:45 PM
You seem to be assuming that the skill of these executives is strongly correlated with their pay. I am dubious that this is actually going to negatively impact the performance of the companies.
Posted by: Max Kaehn at Oct 21, 2009 5:55:06 PM
Alex, what are the odds you give that this will not work as advertised?
Posted by: tgrass at Oct 21, 2009 6:00:10 PM
I have a hard time seeing how this is going to work. If the goal is to get people to quit, then sure, seems great. But I don't think that's the goal. Is it?
Posted by: Bob Montgomery at Oct 21, 2009 6:01:55 PM
Any possibility of extending this to the bureaucracies of the Federal Government?
Posted by: R. Richard Schweitzer at Oct 21, 2009 6:02:28 PM
"If the administration actually follows through, most of these executives will quit and get higher paying jobs elsewhere"
That's the problem with this strategy. If they really want to do this, they should pass legislation imposing an income tax rate of 100% on all income above, say, 250K, on anyone who was an employee at a firm when it received bailout money, regardless of where they subsequently work, until that money is paid back.
Posted by: J at Oct 21, 2009 6:03:29 PM
I don't think this is right.
Even leaving aside the PR disaster of hiring someone who ran a failed company for big bucks, who's going to absorb 50 highly compensated car executives from GM & Chrysler? How many jobs are available at Toyota and Ford that won't be a huge step down in prestige or long term earnings potential - especially given that we would now suddenly have a large supply of talented auto executives?
Ditto to the 100 (or 125, depending on how you count AIG) finance people. Maybe some of the bankers at least have a book of business and could supplement, rather than replace, someone.
Posted by: Joe at Oct 21, 2009 6:08:32 PM
On the surface, this does seem like a pretty draconian measure. But, don't such conditions incentivize repayment? No?
Anyway, I think populist momentum for this kind of action has probably subsided, but good luck generating outrage for the executives of companies being bailed out.
Still, I'm sure this is just further evidence for those who believe Obama is, in fact, the Manchurian candidate that we are are already on the road serfdom.
Posted by: kvn at Oct 21, 2009 6:11:20 PM
How many people would leave? How many open positions are there? Depending on the sizes of both, you could see a real shift in the market compensation rate.
Another question: would profits in the companies that faced an executive exodus see their profits decline by more than the decrease in compensation? That is we may be able to get some idea of whether these executives actually increase the profitability of these companies by enough to justify their pay?
Posted by: Nylund at Oct 21, 2009 6:14:40 PM
Awesome! The government forcing the some of the most competent people in the world to work for peanuts! What does that say to the young children of this country? What a great message! A sure road to incentivizing growth and prosperity forever! Thanks Obama!
(sarcasm)
Posted by: Andrew Stella at Oct 21, 2009 6:27:53 PM
Elsewhere?
Do you mean Canada?
Posted by: zota at Oct 21, 2009 6:28:25 PM
This isn't the government imposing pay limits on the private sector, why on earth should the new owners (us) continue paying high wages when the original justification that they were necessary to get people who could run the company well is so patently false. These people were massive failures, the fact they performed so poorly should be an illustration of the fact that it is very difficult to choose good executives. In light of our newly discovered lack of ability it makes no sense to pay very high wages since our choices are probably not up to the job.
Posted by: Robbie at Oct 21, 2009 6:36:07 PM
Look at the bright side, at least they get to share in the companies profits through their newly appropriated stock options. So IF they stay, there are some incentives being put in place to keep them motivated.
Posted by: John at Oct 21, 2009 6:41:53 PM
Insofar as these are, in large measure, now government-owned corporations, it makes a certain sense to compensate their executives at rates comparable to those high-ranking federal employees receive. Perhaps Secretary Geithner, with a salary of $191,300, who supervises a department employing 116,000 with a budget of $11 billion, simply doesn't think those with comparable responsibilities should be paid disproportionately.
Posted by: Andy Stahl at Oct 21, 2009 6:43:19 PM
Unfortunately, still no evidence of big interest in "Going Galt" or Objectivism more generally, at least in the Google data.
http://offsettingbehaviour.blogspot.com/2009/10/going-galt.html
Posted by: Eric Crampton at Oct 21, 2009 6:46:22 PM
Isn't this one way to solve "too big to fail"?
Posted by: stanfo at Oct 21, 2009 6:46:28 PM
Ok, start the tally of the 175 executives whose pay is being cut who quit, and let's test your prediction, Alex.
Note that some pay is still in the millions range.
And they can still get stock compensation, but they must take the stock and hold it for five years.
Now if they are delivering for their stockholder's long term profits and stability, they should clean up given the low starting price on their bank stock.
Of course, if they were really worth the big bucks, they would have avoided taking the risks that put them at risk - and I thought you wanted them to be fired by a government technocrat known as a bankruptcy judge who would decide to sell a $600B firm for less than $2B as the government technocrat did with Lehman. And if they were a cut above terrible, like the Goldman management, they would have raised enough capital by last June to repay the government and get out from under the supervision of another government technocrat.
These managers failed, and in every case those bitching about moral hazard and government running businesses always call for the firms to be run by a government technocrat called a bankruptcy judge, somehow forgetting the fact bankruptcy judges must approve everything the firm does, and forgetting that bankruptcy judges are government technocrats.
How can you argue that virtue is to have a government technocrat run companies and set pay in bankruptcy court, but oppose a government technocrat setting pay when the government is a big stockholder because these firms otherwise would be in bankruptcy court with pay set by a government technocrat?
Posted by: mulp at Oct 21, 2009 6:51:11 PM
Still, I'm sure this is just further evidence for those who believe Obama is, in fact, the Manchurian candidate that we are are already on the road serfdom.
Aren't about 50% of Obama voters outraged that Obama isn't the radical leftist commie socialist that would nationalize everything from health care to energy that Sarah Palin promised he was?
Posted by: mulp at Oct 21, 2009 6:57:55 PM
Going Galt?
I don't believe you people.
Posted by: Dirk at Oct 21, 2009 6:59:14 PM
if the readers of *marginal revolution* are reacting this way how do you think the populace as a whole feels right now? simon johnson is right, people feel the system and crooked, and without trust, there goes the system.
Posted by: razib at Oct 21, 2009 7:11:48 PM
Apparently, this idea does not work internationally, or we would be forced to assume, for example, that in 1990 the Chrysler executives were much more capapable than those of Daimler-Benz. You are right, though, in that pay reform needs to be broader than just those unfortunate enough to work for a company that went bankrupt and had to be bailed out by taxpayers.
Posted by: don at Oct 21, 2009 7:12:13 PM
If we assume that these people were rewarded in the past for their mis-management then why are we going after future income instead of past income. I'm guess these people didn't spend everything they earned and thus impounding their assets, and even going so far to as "reset" their social security, would impose an appropriate punishment for causing the bailout situation and would go to recoup that money much more quickly. Then, if they truly are talented they can use those skills to obtain gainful employment that will quickly replenish those reserves that were impounded.
Also, as far a mechanics go, we already have procedures in place to recoup money for reasons such as alimony and child support - those mechanisms should theoretically work for this as well.
And haven't we learned that someone owning stock in a company does not lead them to make good long-term decisions but merely decisions that maximize their return over the timeframe they expect to own the stock. Also, if they leave now they own stock but have no control over how it performs (though it could be said that their leaving would cause a new increase in the stock price...)
Posted by: David J at Oct 21, 2009 7:16:49 PM
