Friday, October 23, 2009

Executing the Geese That Lay Golden Eggs

I was planning to write on something nonpolitical for a change, but life beyond the blog and the Obama administration intervened.

On Wednesday, the media reported that the Obama administration will issue a diktat sharply cutting executive pay at Citigroup, Bank of America, American International Group, General Motors, and Chrysler. Beyond the constitutional issues (Where exactly does the Constitution authorize the President or Congress to do this?) and legal issues (breach of contract etc.), this makes no economic or business sense. This leads me to the conclusion that either the Administration is more incompetent and ignorant than I already suspect—which is high hurdle for this administration—or that politics is driving this decision.

First, the Economics. A company is usually best served by hiring and retaining the best people, especially at the top. I have worked in several companies. Some have achieved this to some degree and are generally successful companies. Other companies didn't even seem to try and suffered the appropriate consequences. Pay, in whatever form, is an essential key to hiring and retaining the best people. Therefore, anything unrelated to business concerns that restricts pay is a potential cause of inefficiency, both for the business and for the economy as a whole. In the worst case scenario, it can cause the businesses to fail and weaken an entire economy.

As for the targeted corporations, the Obama administration is essentially signing their execution orders or at least doing its very best to kill them. All of these corporations are in precarious situations and therefore need the best leaders they can hire, yet the special master in the Treasury Department has picked this time to cut executive salary in these companies by an average of 90 percent and total compensation by about 50 percent. Any self-respecting (and competent) executive would quit rather than agree to work under such conditions.

Most of the corporations are in trouble because of their own poor decisions and in due course the market would have punished them. However, Bank of America's problems appear to stem mostly from its shotgun acquisition of Merrill Lynch, with the Federal Reserve and the U.S. Department of the Treasury holding the shotguns (albeit under the Bush administration).

The Politics. Unlike many in the Obama administration and Congress, I don't believe that corporations—and by extension their executives—are inherently corrupt and evil. (Perhaps my use of "evil" is inaccurate. I'm not certain the Obama administration even acknowledges the existence of evil, at least in the traditional sense.) I don't believe corporations are inherently good either, but that is beside the point.

Assuming that not everyone in the Administration flunked Economics 101, we're left with either the decision makers in the Administration know exactly what they're doing and don't care—perhaps it's a populist tactic—or they truly intend to destroy these companies or at least weaken them for some purpose.

If any of these companies still has a survival instinct, this mess will end up in court. I hope so. I'm a very satisfied banking customer with Bank of America.

"U.S. Said to Order Deep Pay Cuts at Bailed-Out Companies," MSNBC

"U.S. to Order Pay Cuts at Firms That Got Most Aid," New York Times

No comments:

Post a Comment


blogger templates | Make Money Online