Salary Caps for Companies Receiving Bailouts

[Sisyphus]

So every decision of the boards of every corporate recipient of bailout money is going to be a national referendum? Well, that would certainly motivate them to pay it back quickly, but wouldn't it just be simpler/less likely to drive the businesses into the ground to put public representatives in place?

[waitforufo]

What is purportedly unconstitutional about the salary caps?

 

I believe the proper question would be "where in the constitution is a governmental power to cap salaries enumerated?" If such power is not defined then they don't have the power.

 

Reading the news this morning only reinforced my opinion that this salary cap idea is simply a PR gimmick. It will apply to almost no one. Also, executives can still receive huge bonuses in the form of stock, they just can't sell the stock until the bail outs are paid back. But ultimately who would decide when the bail outs are paid back? My guess is that lobbyists will help those decisions along as soon as heat is off the stimulus package.

 

Look, management of these companies ultimately will decide what is best for their shareholders and for themselves. They aren't going to be looking at what is best for the country. If the bail outs make more sense than bankruptcy then they will choose the bailouts. If too many strings are attached, they will choose bankruptcy.

 

If you don't think bankruptcy can be profitable to corporate CEOs, just look into the United Airlines bankruptcy. Employees, screwed (particularly when it came to their pensions). Shareholders, screwed. Chief officers of United Airlines, counting their cash and enjoying their pensions.

[Pangloss]

So they can guarantee pay to top prospects regardless of the financial situation would be one reason.

 

Well that's wrong, IMO. Not for moralistic reasons, but for capitalistic ones. You don't motivate the best work out of someone by guaranteeing a gold mine of compensation. You just do not. I don't care if it's Donald Freaking Trump. Who, by the way, came out in favor of bailout salary caps yesterday.

 

(I know you agree, I'm just giving a reaction to what I'm sure will be touted as an objection by many observers.)

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I believe the proper question would be "where in the constitution is a governmental power to cap salaries enumerated?" If such power is not defined then they don't have the power.

 

Probably somewhere in the vicinity of the place where the EPA's regulatory powers are enumerated. Hint, hint.

 

You seem to be consistently avoiding the fact that this is not a restriction being placed on all companies. It's a restriction being placed on companies that enter into a bailout agreement with the government. Government contracts always carry stipulations. Always.

Edited February 5, 2009 by Pangloss
Consecutive posts merged.

[waitforufo]

All from that bastion of conservative thought - The LA times.

 

The exception will be for grants of stock or other long-term incentives that contain restrictions specifying that they could be cashed in only after the government has been repaid or after a set period that took into account how the company had been repaying the federal money.

http://www.latimes.com/business/la-fi-obama-executive-pay5-2009feb05,0,399075.story

 

Today's cap does not apply to any of the companies that already have received federal money and would have no effect on the recently announced bonuses of more than $18 billion paid last year to Wall Street firms during the sharp economic downturn. Reports of those bonuses sparked the political outrage that led to the call in Congress to limit executive pay.

http://www.latimes.com/business/la-fi-pay-impact-2009feb05,0,4979583.story

 

"You're pitting a group of government bureaucrats against compensation consultants and lawyers who are paid lots of money, and they're pretty damn smart," said Graef Crystal, a former executive compensation consultant who has written six books on the subject. "It's a lot easier to find ways around things like this than it is to invent them in the first place."

http://www.latimes.com/business/la-fi-endrun-execpay5-2009feb05,0,2040936.story

 

Ouch, the tiger has sharp teeth.

[ParanoiA]

Reading the news this morning only reinforced my opinion that this salary cap idea is simply a PR gimmick. It will apply to almost no one. Also, executives can still receive huge bonuses in the form of stock, they just can't sell the stock until the bail outs are paid back. But ultimately who would decide when the bail outs are paid back? My guess is that lobbyists will help those decisions along as soon as heat is off the stimulus package.

 

I guess I'm not clear here, are you suggesting that we should not pass laws when they will apply to almost no one? This is why I'm confused about conservatives being against this - even if it applies to NO ONE, it's still a sound princple to be deployed in bailout scenarios. We should do it because it is only logical, as Spock would say.

 

If it applies to no one, great. If it applies to someone, great. How do we lose here?

 

As far as the stock goes, isn't that a good idea? Doesn't the company have to perform well so they can pay the federal money back? Even if they get trillions of dollars in stocks, how does that affect us adversely when they've paid the bailout money back?

 

I understand the symbolism / substance argument I think you're making, and it makes sense to me in terms of casting a humble shadow, but the argument doesn't support dismissing a fairly universal principle that when begging for money you ought not have gold in your pockets.

[john5746]

Well that's wrong, IMO. Not for moralistic reasons, but for capitalistic ones. You don't motivate the best work out of someone by guaranteeing a gold mine of compensation. You just do not. I don't care if it's Donald Freaking Trump. Who, by the way, came out in favor of bailout salary caps yesterday.

 

(I know you agree, I'm just giving a reaction to what I'm sure will be touted as an objection by many observers.)

 

http://www.cab.latech.edu/~mkroll/510_papers/fall_05/Group6.pdf

 

Yes, I have always thought top management, especially CEO's were over valued.

CEOchart.doc

[ParanoiA]

http://www.cab.latech.edu/~mkroll/510_papers/fall_05/Group6.pdf

 

Yes, I have always thought top management, especially CEO's were over valued.

 

Same here. I have always wanted to try my flip flop idea where office folks make less than the workers. I like the idea of a shop full of talent making the money, while administration, enjoying their controlled environments sitting on their duffs, make considerably less.

 

There are some supervisors out there that really earn their money, and I haven't met any of them.

[waitforufo]

If it applies to no one, great. If it applies to someone, great. How do we lose here?

 

As far as the stock goes, isn't that a good idea?

 

First, yes I have a problem with the government creating meaningless laws. Why give the impression that you are doing something when your not.

 

Second, Obama is trying to get the economy going again. Part of that is keeping the financial system afloat, and the other part is to stimulate economic activity. These are closely related by not exactly the same thing.

 

The companies lining up for bailouts have fiduciary responsibilities. Their primary fiduciary responsibility is to their shareholders. They are not worried about Obama's agenda. If they think bankruptcy is a better option than government bail out, that is what they will choose, regardless of the impact to the economy.

 

The board and the chief officers of these companies believe that quality management is the key to meeting their fiduciary shareholder responsibility. That's why they have been paying those high salaries and bonuses. Also, how will they attract quality management in the future if they don't honor contracts to current management? As I said in earlier posts, I don't see how government action can cancel those existing contracts.

 

So if Obama thinks its better for the economy to bail out these companies than let them go bankrupt he has to make the bail out offer attractive to those deciding to accept the bail out. You know, those same people he is trying to reduce their compensation. If he doesn't convince them, they won't accept his terms and the economy suffers.

 

So if he wants to be remembered for his high principals that got in the way of economic recovery, he can join Hoover in the history books.

 

With regard to acceptance of stock bonus, conditions like "after a set period that took into account how the company had been repaying the federal money" seem meaningless to me. They might as well say 'wink wink, nudge, nudge, you bad chief officers can't have those large compensation packages any more.' Like I said this is all just a PR gimmick.

[Pangloss]

Laws trump contracts. I'm not sure what's so hard to understand about that.

[iNow]

...

[ParanoiA]

First, yes I have a problem with the government creating meaningless laws. Why give the impression that you are doing something when your not.

 

If people stopped committing murder, do we wipe it from the books? It's a sound principle for murder to be illegal even if it isn't a popular problem. That's all I'm arguing in salary caps for bailouts.

 

 

So if Obama thinks its better for the economy to bail out these companies than let them go bankrupt he has to make the bail out offer attractive to those deciding to accept the bail out. You know, those same people he is trying to reduce their compensation. If he doesn't convince them, they won't accept his terms and the economy suffers.

 

I guess I didn't see this as a sales maneuver. I thought this was essentially companies on one knee asking to be saved. I really can't relate with the notion of baiting a hook to tempt a bailout. That could open a whole 'nother can of worms. How long until companies start effectively extorting the president with de facto threats of bankruptcy?

 

I reject any effort to "sell" a bailout, even more emphatically than I reject a bailout. I'm finding it harder and harder to even comment here.

 

So if he wants to be remembered for his high principals that got in the way of economic recovery, he can join Hoover in the history books.

 

If any president can be remembered for his high principals, it's an improvement.

 

Your point is taken though, I just don't agree with it.

 

With regard to acceptance of stock bonus, conditions like "after a set period that took into account how the company had been repaying the federal money" seem meaningless to me. They might as well say 'wink wink, nudge, nudge, you bad chief officers can't have those large compensation packages any more.' Like I said this is all just a PR gimmick.

 

Right, bad chief officers haven't earned large compensation packages when they're asking for a bailout. Notice I said "asking for", not "agreeing to". And I say they haven't earned it from the perspective of a forced investor holding some percentage of the company depending on the size of the bailout - so my demands are reasonable. I don't pay failures. I fire them. They should be happy if I agree to let them wipe down the toilets for minimum wage.

[iNow]

I reject any effort to "sell" a bailout, even more emphatically than I reject a bailout. I'm finding it harder and harder to even comment here.

 

I sincerely hope that you don't mean that you find it uncomfortable to post honestly about your feelings here. I don't think many of us are necessarily "for" a bailout, but we can at least see both benefits and costs about doing one. That's how I've, at least, tried to position my own arguments.

 

Either way, I know it can be hard to post and feel like you're part of a minority, but I respect your opinion on this (as well as others), as it has helped me to shape my opinion and adjust much of my own lop-sided thinking. I find your viewpoints on these issues incredibly beneficial, and I'd be mighty pissed off if you stopped sharing them honestly, or even stopped sharing them at all.

[ParanoiA]

Oh no, no, I didn't mean that at all. Man, I'm just not sharing my thoughts very well this week.

 

No, my friend, I don't mind being in the minority opinion at all and actually feel more comfortable there most generally.

 

I've been trying to articulate my position of supporting capping CEO pay, while not supporting the bailout outright. Waitforufo offered up the idea that Obama should make the bailout desirable to the failing company. My statement was more along the lines of..."I'm finding it harder and harder to maintain this ambiguous position....it was cool when the bailout was a mercy offer, but if we're trying to create incentive, then my partition doesn't even exist.." Totally a reply to waitforufo.

 

Nah, I love this place. You guys rock.

[DrDNA]

So if Obama thinks its better for the economy to bail out these companies than let them go bankrupt he has to make the bail out offer attractive to those deciding to accept the bail out. You know, those same people he is trying to reduce their compensation. If he doesn't convince them, they won't accept his terms and the economy suffers.

 

I agree with almost everything you said.

However, where I do disagree is, I think that the economy **may suffer in the *short term if the bailouts are cut off or refused.

 

Do you see that it may also be logical to conclude the economy will benefit more in the *long term when the obsolete and corrupt companies that drove themselves, my colleagues' jobs and my 401K into the ground are replaced with newer and shinier companies.

 

Our economy is like an ecosystem.

And I see this as similar to damming up rivers in an effort to make 'clean power'.

The intentions are honorable, but we neglect, ignore or are ignorant to the fact that there are dramatic, long term and negative consequences for our actions.

Sure, we light a few bulbs without polluting the air.

But the whole aquatic ecosystem gets knocked out of whack.

So the salmon, the trout and rest of the river dies....eventually affecting the ecosystem of the ocean.

 

This whole thingamajibber, including executive salaries, should play itself out if we can just stop trying to mess with the natural progression of things.

Edited February 6, 2009 by DrDNA

[iNow]

Man, I'm just not sharing my thoughts very well this week.

 

Much more likely is that I'm sometimes prone to idiocy. Thanks for clarifying.

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This whole thingamajibber, including executive salaries, should play itself out if we can just stop trying to mess with the natural progression of things.

 

I see the point you're making, and found your analogy insightful, but isn't "leaving the economy alone" part of what caused this whole mess? Even Greenspan, poster child of the free market, conceded that reality doesn't seem to fit the ideal of a free market he'd held for so many years.

[DrDNA]

I see the point you're making, and found your analogy insightful, but isn't "leaving the economy alone" part of what caused this whole mess? Even Greenspan, poster child of the free market, conceded that reality doesn't seem to fit the ideal of a free market he'd held for so many years.

 

Not really.

 

I firmly believe that..........

-being addicted to a limited supply of petroleum that we do not own or control (which controls the price of EVERYTHING....even food AND diapers.....so in ya and out of ya are connected to it)

-fighting a war with an imaginary enemy

-giving loans to people that couldn't afford them (see the last two items below)

-Greenspan constantly dickering with the system (which he now admits was a mistake)...like he thought he was the Wizard of Oz of the economy

-shipping manufacturing jobs to Mexico and Asia (Ross Perot's "great sucking sound")

-blatant corrupt and often illegal behavior

-and out-right stupidity

 

........are what drove us down this road..

 

I hope I didn't leave anything important off the list, but I'm sure that I did.

In any case, the last two are probably sufficient to cover everything anyway.

[D H]

Do you see that it may also be logical to conclude the economy will benefit more in the *long term when the obsolete and corrupt companies that drove themselves, my colleagues' jobs and my 401K into the ground are replaced with newer and shinier companies.

If yours is anything like mine, you do not have a 401K anymore. You have a 301K.

 

Some of those executives deserve federally-funded room and board, 7 years worth or more, rather than a federally funded salary.

[DrDNA]

Mine is a 101K!

It's bad and getting worse.

 

For those of you that don't know yet, it is finally hitting even the nanotech/biotech sector.

 

We just had an 18% 'Work Force Reduction'.

EVERYONE's name was on one Excel spreadsheet with ten minute time differentials next to them.

They lined us up one by one.

Every ten minutes one of us went into the room like pigs to the slaughter house.

The people either came out of room smiling, but shell-shocked or came out looking desperate and doe eyed

That number does NOT include just acquiring one company of about 50-odd people and laying off 50% of its staff (keeping the product line), and acquiring another company of 30-odd and keeping only 2 (and killing their entire product line).....seems kind of, well, just plain messed up doesn't it?

 

The layoff is after taking an ~10% pay cut and giving up our 10-13% company performance-based bonuses for '09 which we ALWAYS received and most of us relied on.

The pay cuts were to keep from laying anybody off

 

Even the local state University is laying off a huge number professional staff due to budget cuts.

Of course they grew like a cancer that last 6 years....building buildings after building.

Not hiring teachers or tenure track, but "Associate Research Professors" to populate all the grants that they were going to bring in with the new buildings.

Yes folks. Buildings bring in grants or so Univ admin thinks.

 

EDIT: I know I kind of ran away off topic with this rant. Excuse me.

Edited February 6, 2009 by DrDNA

[npts2020]

What I have not heard from anyone supposedly knowledgable about the economy, is how putting money into sectors of the economy that are losing money hand over fist will keep the economy afloat beyond the time money is being poured into it.

[waitforufo]

I agree with almost everything you said.

However, where I do disagree is, I think that the economy **may suffer in the *short term if the bailouts are cut off or refused.

 

Do you see that it may also be logical to conclude the economy will benefit more in the *long term when the obsolete and corrupt companies that drove themselves, my colleagues' jobs and my 401K into the ground are replaced with newer and shinier companies.

 

Perhaps I am giving the impression that I'm happy about my posted comments on this topic. I am not. Yes I do think the "economy will benefit more in the *long term when the obsolete and corrupt companies that drove themselves, my colleagues' jobs and my 401K into the ground are replaced with newer and shinier companies."

 

I also agree with the following statement from ParanoiA.

 

I really can't relate with the notion of baiting a hook to tempt a bailout. That could open a whole 'nother can of worms. How long until companies start effectively extorting the president with de facto threats of bankruptcy?

 

I reject any effort to "sell" a bailout, even more emphatically than I reject a bailout. I'm finding it harder and harder to even comment here

 

The people running these companies receive those huge compensation packages for a reason. They are cut throat business people who will always exploit every advantage they think they have. That's why they were hired. If they perceive an ability to extort the president (more correctly the country) they will do it.

 

Evidence that they are getting away with it.

 

"Goldman, JPMorgan Won’t Feel Effects of Executive-Salary Caps"

http://www.bloomberg.com/apps/news?pid=washingtonstory&sid=azVLk.22AkLI

 

So do I think we should just let these companies go bankrupt? Well, the economy is in a correction. Things like housing are overvalued. Banks, with strong encouragement of government, loaned money to people who could not pay it back driving the overvaluation of housing. This correction needs to take place. What we don't want is a banking panic. That would cause damage beyond the needed correction. Also we need a stimulus to keep people spending through the correction. This will not stop the correction, but should prevent needless constriction in spending (over correction) induced by future economic worry in the general populous.

 

Finally, another thing we don't need is ramping up fear in the populous.

 

http://www.breitbart.com/article.php?id=D965I5CG4&show_article=1

[ParanoiA]

So do I think we should just let these companies go bankrupt? Well, the economy is in a correction. Things like housing are overvalued. Banks, with strong encouragement of government, loaned money to people who could not pay it back driving the overvaluation of housing. This correction needs to take place. What we don't want is a banking panic. That would cause damage beyond the needed correction. Also we need a stimulus to keep people spending through the correction. This will not stop the correction, but should prevent needless constriction in spending (over correction) induced by future economic worry in the general populous.

 

That's a thoughtful post. I like the way you framed this. Perhaps I'm being a bit too idealistic in dismissing fear of banking panic or overcorrection.

[ecoli]

So do I think we should just let these companies go bankrupt? Well, the economy is in a correction. Things like housing are overvalued. Banks, with strong encouragement of government, loaned money to people who could not pay it back driving the overvaluation of housing. This correction needs to take place. What we don't want is a banking panic. That would cause damage beyond the needed correction. Also we need a stimulus to keep people spending through the correction. This will not stop the correction, but should prevent needless constriction in spending (over correction) induced by future economic worry in the general populous.

The problem, though, is that stimulus is just as likely to reinflate old or create new bubbles... particularly because its being financed on debt and monetary inflation. When it comes time to pay back those loans, we're going to go through the depression anyway.

 

The gov't. is trying to keep up demand for things like housing and consumption goods, but also trying to do so without lowering prices (to maintain employment). You can't do this is a long term way.

 

Considering stories like these will become all too common, there's little chance we'll improve overall productivity by providing bailouts.

[Pangloss]

Mine is a 101K!

It's bad and getting worse.

 

Cute.

[waitforufo]

The problem, though, is that stimulus is just as likely to reinflate old or create new bubbles... particularly because its being financed on debt and monetary inflation. When it comes time to pay back those loans, we're going to go through the depression anyway.

 

The gov't. is trying to keep up demand for things like housing and consumption goods, but also trying to do so without lowering prices (to maintain employment). You can't do this is a long term way.

 

Considering stories like these will become all too common, there's little chance we'll improve overall productivity by providing bailouts.

 

I agree with all the above particularly if government is trying to stop the correction. That’s just impossible. The government just doesn't have that kind of money. I hope they can stem panic and the stimulus cushions the blow.

[iNow]

Okay, so here's how it should work.

 

A few months ago, all senior executives and director level employees at my company took a pay cut... Execs at roughly 15%, directors at roughly 10% IINM.

 

Today, the executives announced that they are all taking an ADDITIONAL 20% cut, and NONE of them will be accepting ANY bonuses this year. That translates into roughly 60% pay cuts for each of them. Also, we are shutting down the company in various sectors several weeks here and there, and the overhead operating costs are being reduced drastically (several hundred million dollars) as a result of these measures.

 

And, we're not even getting a bailout!

 

 

This is what GOOD business people do, damn it! I'm SO proud to work for these guys. Despite the fact that me and a bunch of my friends may not have the opportunity to work for them for much longer (layoffs are still coming, and many will be impacted), this is how you run a big business intelligently.

 

So, you know what? I'm a bit pissed off that everyone is railing against Obama for calling for salary caps and greater responsibility, instead of focussing the anger and frustration where it belongs... On the CEOs and executives who are too frakkin stupid to know to do this without someone telling them it's necessary.

 

 

I sure hope I keep my job, and my chances of doing so just went up by quite a lot because there are bright guys leading us. That matters, people... not some stupid ideology based on what you heard on AM talk radio this morning.