Thursday, June 11, 2009

Pushing and Popping

When government tries to control markets, they push on one end and something they don't like pops up on the other end. So they push on the other end and something else pops up. The Obama administration's preoccupation with executive pay is illustrative.

Early in 2009 someone realized that executives at the bailed-out insurance company AIG had earned large bonuses, consistent with contracts which had already been approved by the government bailer-outers. Death threats for these executives followed, in the wake of the furor ginned up by congress and by President Obama. Obama promised to squash bonuses for bailed-out companies.

Then the administration realized that if they cap executive pay at bailed-out companies that the companies would lose their best talent to non-bailed companies, making it more likely that the companies would require more bailouts and/or would fail (push/pop).

Government pushed again, looking at the possibility of controlling the pay of all executives, whether their firms had been bailed out or not (push/pop/push).

Of course, that would likely cause another pop, as firms in the U. S. lose top talent to other countries. So what if the American system fails? Those executives will be making great contributions to the American offices of an expanded Deutchbank, where my account will be (push/pop/push/pop).

Now the administration seems to have scaled things back. The new pay czar, a lawyer named Kenneth Feinberg, will be able to set pay at bailed-out companies--decisions not subject to appeal. Thank goodness for lawyers with godlike intelligences and tyrannical mandates.

Meanwhile there has been another pop. The Wall Street Journal reports, "Morgan Stanley has said it is de-emphasizing annual cash bonuses in its pay packages, relying more on base salaries, restricted stock and deferred cash payments subject to clawbacks if the employee's bets turn sour down the road."

"Uh, Mr. Arkwright . . . we're not going to offer you $100K plus a possible $125K bonus if you perform well. We're going to offer you $100K now, plus $125 at the end of the year. Oh, and if you don't perform well, we'll take back the $125 we promised you."

I only hope that Feinberg is not skilled enough in semantics to recognize this rephrasal of the standard bonus contract. If so, get ready for another push.

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