Sigh… Obama Screws Up Businesses Again…

by Victor Cheng

I just read the latest news that the Obama administration is instituting a 90% pay reduction for the top 25 employees at all the companies that were provided bailout money.

The idea is that voters are irritated at the idea that these executives are making a lot of money and getting paid with tax payer dollars.

While this may the politically acceptable solution to bad publicity, it’s a pretty dumb move.

Let me ask you, if you’re really good at what you do for work and your “boss” gave you a 90% pay cut, what would you do?

Duh… I’d quit.

Now think about who in the world would be dumb enough to want a top 25 job at say a major bank that’s really in terrible financial shape?

You’re assigned “mission impossible” and you get paid pretty nothing.

The only kind of person who takes this kind of job is one who has no other choice. You can be sure it’s not someone who’s really good at what they do.

This seems like a pretty lousy way to protect the government’s investment in these banks. Yes, lets give someone $100 billion in bailout money, and then find the least qualified person to manage it.

I generally don’t talk all that much about politics. But, this was such an short-sighted decision that it’s absurd to anyone with any business sense.

Comments

{ 13 comments… read them below or add one }

Leif Stenlund October 26, 2009 at 6:08 AM

I’m not very good at economics and stuff, but to me it seems like they didn’t do a very good job, needing the bailout money in the first place?
But I agree that it is a dumb way to do it. I think it was the Bush administration that issued the bailout money? They should have done it with very clear objectives and instructions for what the money should be used for.

D. Tong October 26, 2009 at 8:37 AM

The bail-out and lack of oversight/monitoring was orchestrated by Paulson, an ex-Goldman Sachs guy…no surprise who survived the Wall Street meltdown.
Dumb move? For a politician, not really…After all, do you think that these pay cuts will continue forever? Don’t you think that these TARP banks will now be quite motivated to pay back the Feds ASAP? Would it surprise you that there may be a long line of individuals waiting for these soon-to-be vacated positions (they can’t all be incompetent)? And, where are all these high-paid, God’s gift executives headed to? Another soon-to-fail bank? Well, improved regulation may be coming soon to all banks, so the choices for an anything goes, “I’ll pay you anything” wild, wild West banking house may soon change.
The false assumption is that these highly paid individuals are the brightest guys on Wall Street…i.e. they are paid the most, ergo they must be the best and brightest…conversely, that whoever fills their vacated positions are not the best and brightest. I disagree and I can provide examples of extremely intelligent professionals that are not paid as much as these bankers, e.g. physicians, scientists, engineers. Also, when money and compensation drives decision-making, don’t you think ethics and morality become less important (e.g. Madoff)? In a Darwinian sense, perhaps, the system has selected for a few talented (but flawed) individuals who have led us all down the path to societal and economic near-disaster.
Should the American taxpayers be held hostage by a few highly-compensated Wall Street bankers? The answer for me is NO!

Marc October 26, 2009 at 9:16 AM

you voted for him? a pro business guy like you voted for Obama? Now that is surprising. What were you expecting from a man with ZERO business experience. He was a community organizer before he became president. The only thing he know about banks are the ATM’s. Come on Victor, common sense would tell you that Obama wasn’t going to make things better. He didn’t start this mess but he’s certainly isn’t the one who will get us out of this. I still can’t believe you voted for him. Did you also get swept up in the hope and change wave last November? He’s essentially running things the same way as Bush.

Victor Cheng October 26, 2009 at 11:37 AM

@D. Tong:

You raise fair points. But in many (but certainly not all) cases the guys who screwed are already gone. The people in place now are those who are supposed to clean up the mess left behind.

Personally, if I’ve made a $1 trillion investment, I’d like to have the best possible person in the role to look after it so I can get my money back. Happy to spend $10 million to get back my $1 trillion.

Victor Cheng October 26, 2009 at 11:40 AM

@Marc:

Yeah, I voted for the guy. I’m generally a middle of the road guy politically… and I would have like to vote for McCain minus two big problems. One, he himself admitted he didn’t know anything about the economy. (And in comparison Obama had Warren Buffet and Volker to advise him).

Second, I had difficulty with the idea that Sarah Palin (the now self proclaimed “Rogue”) holding the key codes to the nuclear “football”.

I did expect Obama to be less favorable to businesses, but certainly not to this extent.

Keith Bateman October 26, 2009 at 12:42 PM

The current situation is the direct result of the highly educated (read: privilege) being promoted beyond their abilities and a financial system that rewards short-term results and failure. Don’t worry ego and competition will fill these top positions. They are not taking the risk for the money. Most come to these top spots wealthy and are compelled by the challenge.
The root of this problem seems to be the tie between executive compensation to stock market performance. Companies no longer control their stock price through financial performance. I have experienced many quarterly calls where the business has achieved positive bottom line results only to have the stock downgraded or price decrease because it was not in line with analyst expectations.
Today, it seems that a stock analyst has more control over stock performance than the company. Sideline experts like the analyst community exist in other industries like sports writers, movie critics, TV talking head, etc. I imagine most analysts have never run a company but they are always quick to tell a CEO what they are doing wrong and moving the stock price in the process.
The implementation of SOX was also a political knee jerk response to corrupt smart people led down the short view path. How is that working? Instead of government intervention which always has unintended consequences, companies should try to take back ownership of their financial performance. A solution is to have the BOD establish intermediary and long-term financial goals and tie C level compensation to those benchmarks. I do not think it is sufficient to stop with the CEO but all C level executives should be tied together for better or worse. Salary should be stated in terms of +/- of the benchmark and all stock options and stock compensation should be eliminated.

Ron McFarland October 26, 2009 at 2:34 PM

Hi Victor,

I disagree somewhat with your thoughts below. I think the only people that should be managing these grossly poorly managed companies are people that should be paid only US$1/month until the turnaround is completed. Then and only then should they get great compensation. For these companies to survive, a lot of people will have to make sacrifices, and it should start right at the top. He should be #1 role model for cuts.

Personally, I kind of like Carlos Gohn’s approach to his accepting coming here to Japan and turn around Nissan. He said right up front that he would fire himself in three years if he couldn’t get the company profitable by then. The rest is history.

The sole goal of accepting one of these turn around jobs should be just that and not a great deal of personal profit (with the company in such deep holes).

I fully understand that my thoughts might be in the clouds and possibly few people will pick up these assignments, but a great turnaround would make a big impact on someone’s future no matter what the direct compensation package is. I’m sure it will have to be people who no longer need the money. They just want the assignment, the challenge and the desire to serve.

You might be right, but I hope I am.

We will see.

Thanks for the thoughts.

Ron in Tokyo

Victor Cheng October 26, 2009 at 3:36 PM

@Keith Bateman:

Keith I totally agree with your point about C level compensation in general. Personally, I think the comp levels are fine, but the form of currency is all wrong.

C-levels should be paid out in stock that’s restricted so they can’t sell it for 10 years. It’s fine to make your quarterlies but don’t screw the business up so bad it’s worthless 10 years from now.

It puts a greater emphasis on making decisions that are smart in both the short and long run. It penalizes “managing earnings” to goose near term revenues at expense of long term profits. In other words, it makes C-levels operate more like true business owners — ones that are very aware that there is always a personal upside and downside to every business decision.

Most hired gun CEO’s suffer no personal downside when they make a bad business decisions. Heck getting fired is nothing compared to having your life’s savings on the line.

Victor Cheng October 26, 2009 at 3:39 PM

@Ron McFarland:

Ron – I don’t think I disagree with you all that much. I have no problem with deferred compensation. But in general, I do have a problem with not being able to afford to put good people in the right roles.

Gogo | Denver Marketing Consultant October 26, 2009 at 3:45 PM

This is such a patently bad idea, it’s hard to believe that it actually made it into a cabinet level meeting, talk less of actually being implemented!

It’s not that I care what any of the C-level corporate boys (and gals) are making, as a matter of fact I think that most of the pay is grossly inflated and probably due more to “Board of Director” in-breeding and nepotism than anything else.

However, I think the solution should come from some type of market mechanism, and definitely not put “bailout companies” at an actual competitive disadvantage because of some short term political consideration that almost nobody will remember or appreciate even 10 months from now.

My two cents.

Kristopher Wong October 26, 2009 at 4:05 PM

Hey All,

Firstly, let me respond to the initial post then proceed to some of the responses. I agree that these short sight measure imposed by your administration. Who would work in a situation where all the cards in the deck are against you and you are being paid blow that which the market will bare? The answer is implicitly someone (as Victor had indicated) unqualified/unequipped or someone with a HUGE ego that wants to prove him/her self. I for one would NOT have confidence in a bank with such a leader. Yes he/she may have the potential to turn the situation around; however, they could just repeat the same mistakes… The point is it is a risk, potentially a major risk. I would suggest probably more of a risk than paying an expert a fair and equitable compensation package.

To D. Tong, lots of great points. Should the American taxpayers be held hostage by a few highly-compensated Wall Street bankers? Although you answered NO; let me propose this. Would you pay someone that holds the keys to successfully adverting destruction worse than a nuclear bomb? Or would you choose to pay less for the potentially unqualified and definitely inexperienced person? Unfortunately, that is what it ultimately boils down to.

To Ron, interesting points. I agree that personal achievement maybe motivation for some individuals. I agree that if someone took these banks and turned them around he/she would be offered multiple roles at other companies. Unfortunately, I doubt one of these people would emerge from the woodwork. Let’s face it the probability for failure even for an experienced veteran is relatively high in the current environment. I for one would like the favorite on top rather than the scrappy underdog that may have potential but has not proved it.

Thanks,
Kris

LS Allen October 26, 2009 at 9:07 PM

Nope, actually offering those astronomical salaries causes the “really good” people to be crowded out by those who really want to get the money.

Remember that those folks you claim are “really good at what (they) do” augured their firms into the ground, while attempting to still take those high salaries home. This begs the question of what is the definition of “what they do”. Seems that it is simply to extract money. So do I want to finance that with my tax money?

This leap of an assumption that high pay will by itself cause the best suited to gravitate to a job is a serious error that is rampant in the business community. We all know of firms that purposely pay below-average salaries to avoid the money-only-seekers and to attract the motivated and proficient.

Thanks for giving me a little more insight on the thought processes and values promoted by this site. Or perhaps your comment is just a radio-talk-show-style incendiary remark, intended to generate traffic. In that case, it appears to have worked, and thanks for giving me a little more insight on the thought processes and values promoted by this site.

LSA

Victor Cheng October 27, 2009 at 9:52 AM

@LS Allen:

LSA – I actually know a bunch of former clients in the C-level of Fortune 500 companies. At that level, you’re partly right the money in and of itself is not the primary motivator. They got enough to meet their financial needs, they don’t “need” more.

But in that upper echelon of business talent, business is a game… it’s a sport. And what these guys (mostly guys, a few women) desperately need is a way to KEEP SCORE.

This is what they compensation package provides… a way to keep score. Maybe it shouldn’t be this way, but for 9 out of the 10 type of people I know at this caliber, they need a way to track how their career is progressing.

I kind of like the earlier suggestion of deferring the bulk of the compensation… which I think meets shareholder/tax payer needs, while still would be a draw to the top talent.

Basically, in the social circles these guys hang out it, a person who would take a take C-level job at a bailed out bank, having the government as your boss (yikes!), deal with all the BS that comes with it, AND take a 90% pay cut to do it would pretty much be considered a complete moron.

Again, I don’t necessarily think that… but I’m just trying to share my take on what happens in these social conversations in those circles.

As for stirring up the pot, I was actually quite surprised there was so much discussion on this topic. I thought it was a pretty much open and shut case (but certainly am open to changing my mind).

Actually this post and the one on switching from Windows to Mac have gotten the most comments (who knew?).

Thanks for your contribution (and others) to the conversation… I eagerly await what this social experiment called blogging will bring each day.

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