The Trunk

The Best is not a Myth

Jeffmiller wrote on Obama’s proposed salary caps. He concluded with, “Are we really going to limit the ability of the most troubled, distressed companies in the country to hire the best talent?” I think there are some errors in this conclusion.

First it assumes that the “best talent” won’t work for $500,000 a year. The President of the United States, which is perhaps the most in-demand job in the world, pays less than that. (Technically, more than that when you count benefits—but still significantly less than what a lot of the Wall Street guys are making.) Being the CEO of some of these companies comes with its own prestige.

Secondly, it assumes those responsible for hiring are able to determine who the “best talent” is. In some cases, this means short-term success at previous companies, which is part of how we got into this mess. Perhaps we should say “the usual suspects” rather than “the best talent.” Ultimately, there are more people who look like they could do a fantastic job managing a giant, distressed company than there are giant, distressed companies. And many of them will be perfectly happy to work for $500,000 a year. And yes, some of these people may do a better job than others—but when you’re hiring somebody, you don’t always know which is which. All you know is that the guy willing to work for a mere half-million is already saving the company (and the shareholders) money, relative to the prima dona demanding ten or twenty times that.

The only reason these guys can expect that kind of salary is that the previous guy also had the same salary. The expectation is that they will be paid that much—and who will argue? That expectation just chagned.

Okay, a few things:

In recent decades, the Presidency has been a prelude to millions of dollars in speaking fees, etc. Even putting that aside, the fact that the President gets paid less than $500,000 isn’t all that convincing to me, considering the quality of the men attracted to the job. I would expect a similar quality of men to be attracted to the hamstrung executive positions offered by our nationalized banks. This is not a good thing.
Some people add value greater than $500,000. When Tom Hanks does a movie, he’s worth more than $500,000. When A-Rod laces up his cleats, he’s worth more than $500,000. When J.K. Rowling turns her latest novel in to her publisher, she’s worth more than $500,000. The work of businessmen is more abstract to us, but it doesn’t mean that it can’t be just as valuable, or even more valuable.
Yes, there is prestige associated with being CEO of a failing financial institution. There is also prestige in being CEO of a solvent one. And if the solvent one is willing to pay considerably more, where will the talented CEO choose to work?
Does it bother you, even the slightest, that Obama simply picked a number out of a hat? $500,000 is a nice, round number. Is there a logic behind it? Since we’re talking about the leadership of important financial institutions, you’d think there ought to be some logic behind the rules by which we’ll fill these positions. But there was no logic. There was a just a nice, round number. It’s almost as if Obama doesn’t think his decisions actually have any real world consequence beyond the headlines on the day he announces them. I expected more from Obama.
The Best is not a myth. No, we can’t always identify it upfront, but sometimes we can identify it in action, and when we do, we should reward it and cultivate it and hold on to it for dear life. You note:

Ultimately, there are more people who look like they could do a fantastic job managing a giant, distressed company than there are giant, distressed companies. And many of them will be perfectly happy to work for $500,000 a year.”

Maybe there are more people who look like they could manage a giant distressed company than there are jobs, but I don’t think many of these people actually could do it. If we luck into finding one who can, we ought to be able to retain him when someone offers him fifty times more to join their company. If someone is worth $100,000,000 to a distressed company, we lose an awful lot of money if we let him go because we wouldn’t pay him more than $500,000 to stick around. Taxpayers are hurt by this. But hey, Obama got a nice headline during a week when everything else he did looked like a disaster, and that’s all that matters to him.

UPDATE: Finally, let me add this: I’m not saying these companies were run well—they weren’t. I’m not saying that the executives in these companies did a good job—they didn’t. I’m not saying that they earned the pay their got—I wouldn’t be surprised if a lot of it gets taken away in class action lawsuits. All I’m saying is this: The companies were mismanaged. Usually, mismanaged companies go out of business and the bad managers lose their jobs. Here, the government has decided to save the companies, preventing the natural consequence of a lot of bad work. I don’t think that bailed-out companies should pay big bucks to people doing lousy jobs. I think corporate boards and institutional investors need to step up their oversight of these institutions. I think there should be a lot of scrutiny on executive pay. I think new compensation schemes are probably necessary. And I think it’s reasonable for the government to have some role in this if these companies voluntarily take taxpayer money. But Obama’s blanket fiat isn’t thoughtful; it isn’t smart; and it isn’t going to work. It was a headline grab from someone who promised to be better.

Source: jeffmiller