I was startled last week when Mr. Obama, in an interview with Bloomberg News, questioned the case for limiting financial-sector pay: “Why is it,” he asked, “that we’re going to cap executive compensation for Wall Street bankers but not Silicon Valley entrepreneurs or N.F.L. football players?”
Mr.Obama, for the sake of America, i hope you are smarter than this. The more cynical side of me says you are and are either bought by the Financial Industry or as Krugman suggests in his column, you are not up for any kinda fight. I just don't know which among these three choices can be given a good spin.
7 comments:
somehow i am not inclined towards capping executive pay. I have the same question, will you cap it for NFL and NBA players or in any other category who gets paid more? If the president starts doing this, I am sure that we will become socialist sooner than we expected
ok, the reasoning here is not so much the absolute value per se. Its about perverse incentives that encourages mindless risk taking in wall st. No one would care if it brings down only the team (as in NBA or NFL) or the company (in case of Silicon Valley), but what happens in Wall st brings down the whole economy. I think after all the bailout that was required from the tax payer, it is only natural that there be systemic regulations put in place to prevent the guys in wall st from bringing the whole economy down.
True, on the other hand it brings down most teams without enough cash or the ones in small cities (NBA NFL MLB).
Silicon Valley: We still remember the 2000 days... wasn't IPO's from silicon valley part of the problem which brought the system down and then real estate brought the economy back.
Bailout - isn't it part of the system which was flawed. I am one of those people who supported year ago. You can do much more regulations than controlling someone's pay. After all the board of directors and the share holders have a say in the pay. Although my answer may be ambiguous, I don't support someone controlling someone's pay :).
Smaller cities = smaller market = smaller revenue. So it is only logical they would be at a disadvantage. But, is paying NFL players going to affect my job (and my neighbors) in ways that can affect my life? The answer is No. So, it is not the same as wall st compensation. Paying a player a few million dollars is not the same as Lehman's, AIG's, Merrill lynch's, Wachovia's BofA's CEOs taking millions and then bringing down the bank and the rest of the economy along the way.
when a whole lot of IT companies went down in c2000, none of the (individual) companies had to be bailed out to keep the economy working. There was no "too big to fail" companies that could bring down the whole economy along the way. It was a rough period, but it did not need govt intervention on that scale and hence there is no need for the govt to put any limits.
In the case of Banks, since one can always show short term profits, while the bank is actually bleeding money in reality, and the role they play in the economy, it is only required that there are regulations put in place and pay (including bonus) is based on long term profitability. It is only warranted when tax payers like you and me have paid for these banks' survival.
The idea is to discourage taking excessive short-term risk without thinking about the long-term. Bonuses should be linked to long-term achievements rather than short-term successes. Imagine what would happen if cricketers were paid bonuses for the number of boundaries scored (instead of winning tournaments). Teams would get bowled out for low totals well inside their allotted quota of overs despite having high run-rates. Pacing and building an innings, being patient, waiting for the right opportunity to take risks, taking calculated risks, etc. are all virtues - good qualities which seem to have gone past an entire generation of wall street folks.
I am not knowledgeable in this but I was wondering. If the practice of taking 'mindless risks' or actions that would have undesirable long term repurcussions, then it is these practices that need regulation and not just a cap on the salary of some CEO. Or am I missing something?
Ashank - The reason is becoz CEOs (who are usually the highest paid) paid themselves tens of million showing profits in the short term. Most bonuses are tied to the profit generated. So, they went into over drive and we all know what happened with subprime loans, CDOs etc., While Lehman Bro's, Bear Stearns, BofA, GS, Wachovia et., required bailout money to even survive in 2008, the CEOs still got away with their millions because they showed profits with the same financial instruments in 2007 that brought down these banks in 2008. So there is an incentive to show short term profit and since there is no claw-back option, the CEOs can get to keep their millions and move on the next job while the bank they ran goes bust.
That is the reason they are talking about pay cap and claw-back options right now.
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