Friday, July 31

Executive compensation

On the July 28th I noticed that the U.S.House Financial Services Committee approved legislation which gives the SEC power to ban excessive incentive pay at banks and will require shareholders to vote on bonuses. This legislation ensures the SEC can bar a company’s compensation packages when it is considered likely to result in “inappropriate risks.” It remains for the House and Senate to pass the bill before the president signs it into law- perhaps as early as today.

The proposed legislature is in response to widespread community dismay and outrage over the size of salary packages including severance pay provsions to senior executives at the expense of shareholders, employees and the community. However there are two opposing views; those who think governments should not interfere with the market and others in favour of sensible provisions and limits. All republicans voted against the bill. Those opposing any regulation warn of stiffled innovation but I think any healthy growth in a democracy depends more upon a decentralized, widely dispersed innovative core and is largely unrelated to any perceived need for high levels of executive remuneration.Certainly I would argue this viewpoint room my own experience in business.

When I first left school in the country, my first position was with the State Government Lands Department in Sydney and I subsequently paid for all of my own education by studying part time for 7 years before obtaining formal qualifications and a more senior position within the private sector. It was an arduous period in my life as I was both studying of an evening and working during the day combined for many months with daily visitations to the Repatriation Hospital at Concord where my father received treatment for cancer before eventually returning to the country where he passed away. Even though at the time it felt as if I was carrying a heavy burden it did turn out to be a blessing since the combination of concurrent learning with practical experience provided me with such a solid foundation I was able to adapt much more readily to early increased responsibilities than otherwise would have been the case.I recall vividly my first executive position at only 25 years of age and the salary benefits then which seemed to be generous enough - about $ 9,000 PA in a sizeable company with overseas subsidiaries where the MD to whom I reported earned $18,000. By comparison a skilled Toolmaker in the same company could easily earn about $7,500 and the process workers (inclusive of regular guaranteed overtime) earnt between $3,500 to $5,000 PA. There was not the wide spread enormous disparity that exists today but I don’t think there was any lack of innovation or effort either or that generally anyone felt unduly thwarted by a lack of monetary incentive.
At the time I recall a lot of effort went into research and development with new processes and markets developed as the old gave way to new opportunities. Certainly it was also true Australia at the time was experiencing a post war growth fuelled by migration and the baby boom which meant that unemployment levels by todays standards were much lower.

Fast forward 20 years I found the ratios were already off the planet. I recall being employed at the time in the largest service organization (excepting Telstra)in Australia and reported to the MD whose salary package with bonuses was up to 20 times mine and almost 100 times the majority of workers. Australia,like most other western nations was fast becoming part of the global village as recruitment agencies suggested talent was costly but imperative to remain competitive. CEO’s promoted from within the company saw the huge salaries overseas and demanded parity, to compound globalised greediness. It was not uncommon to see salary packages doubling or even tripling overnight with the added provision of overly generous share schemes with no risk to the incumbent. Rather than promote innovation I saw trends in the opposite direction, towards financial engineering and the provision of dubious creative accounting reliant on leveraged increased debt and overly risky practices. Since then the trend has not improved.

Economics also has became tied to the hand that feeds it (how many truly independent econonists are there ? )with less reliance on independent research as it threw off the previous shackles of Keynesian thought presupposing the need to generate government budget surpluses to be only used only during unfavorable trade cycles and ignored the implications of reliance on continued debt creation. In fact the volatile nature of the economic cycles over the past 2 decades from booms to bust is unavoidable given the regimentation towards a free market fundamentalism to ensconce corporate greed and excess in the financial sector. This is the most extreme form of capitalism possible to naively assume markets are self-regulating; governments must never interfere with markets and a governments main purpose is assigned only to be involved in the security at home and abroad.

False accounting for productivity improvements provided the beacon of light seized upon by leading economists that all was well. Overseas divestment in manufacturing were erroneously counted as lower inputs from incoming imported componetary as if these cost reductions were actually achieved by a labour force within the host country.

It is hoped these latest moves will begin a more substantial groundswell trend of attitunal change to make executive remuneration more reasonable and revive an interst in sensible economics but I will not be holding my breath.

Already there are claims the global financial crisis is over, but that may well prove to be premature. Australia faces increased unemployment continuing for most of the next year and the enormous budget deficits now applicable in the USA and UK will involve many more decades of restraint and more responsible governance should those respective countries wish to return to a more sustainable future. The USA budget deficit is now 13% of GDP and is financed by selling more bonds – mostly acquired by central banks and governments who now represent 30% of the total government debt and the USA Governments itself which now holds more than 40%,which in turn it holds in trust for Social security and Medicare. Already debtor nations are expressing disquiet about the mounting debt and the whether the curency can reamain strong. There is no magic pudding to share the risk around.

Hard work and innovation is not injurious to health, but nor was it ever dependant on paying huge salaries to executives.

8 comments:

susan said...

I understand that countries with a budget deficit of more than 3% of GDP can't apply for membership in the EU. Financial services in the US are almost totally non-productive now in matters of the common good. I still see it all collapsing in on itself in on itself in the not too distant future. Perhaps only then will common sense come back in fashion.

I was sorry to read on gfid's blog you've had home computer problems. I hope this post means they've been resolved.

lindsaylobe said...

Hi Susan – unfortunately I needed to purchase a new box since a number of irreplaceable parts had burnt out. But I’m up and running again with much faster response times.
President Barack Obama's going to have to lift the general level of taxes to reduce the huge budget deficit by increasing substantially tax on the wealthy and on middle-class Americans. It will be very unpopular and it remains to be seen what will actually happen, whether people can keep kidding themselves these massive deceits can continue infinitim - otherwise I think the whole system risks gradual collapse.
There are many absurd positions touted such as overhauling health care – as if you do that without increasing the federal deficit – simply put it must be paid for.
At the same Congress will need to extend - again - unemployment benefits for the millions of Americans who have lost their jobs in recent months and need help, which also must be paid for.
Certainly I agree with you the financial services area needs much better regulation and focus on real customers. Whether or not the current measures being considered to rein in compensation, regulate derivatives and extend insurance provisions will be effective remains to be seen.
Best wishes

Seraphine said...

hard work can be injurous, despite comment to the contrary. fishers, truckers, fire fighters, sex workers, soldiers, police- there are many dangerous professions.
being president might be included as a dangerous profession. mr. obama inherited long-developed systemic problems, and already people are blaming him for the economic mess.
i'd love to see him inspire people, like he did during the elections, because otherwise he's not going to get anything done, politically speaking.
people don't like to change, even while the present financial inertia is still negative.
a lot of hard work lies ahead, and none of it is risk-free.

lindsaylobe said...

Hi Sera – these are excellent points you make and certainly you are fortunate to have president like Obama who I hope will make the hard decisions to ensure the country has a more sustainable future.
But when I say hard work and innovation is not injurious to health – bear in mind I use hard in the context of the dictionary definition of hard as an increased level of difficulty (hard as in difficult)since hard work itself or overcoming difficulty or introducing innovation is not in itself bad for our health. The fact some professions are riskier than others does not mean they are harder or easier than others – rather they are riskier, and because of the added risk are likely to more dangerous. Hard work in terms of its difficulty is not necessarily riskier and vica versa.
We cannot avoid risk or taking risks but an awareness of those risks enhances the quality of decisions undertaken.
Best wishes

Cart said...

I note your comments are supported by members of the The Remuneration Tribunal. I guess it is in there interest to see moderation in private sector pay packages but the augments still make a lot of sense.
Reported in SMH - http://business.smh.com.au/business/business-fat-cats-lashed-over-pay-20090805-ea4g.html

Seraphine said...

it's interesting, your comments about wage disparity. the problem isn't that some people make fantastic amounts of money. the problem is too many people- even hard working, educated people- don't make a livable wage. the wealth of a nation should be reflected in the many, not the few.

i'm sorry to read about our father's passing, especially at your relatively young age. you're right, losing a loved one colors everything afterwards.

Seraphine said...

"But when I say hard work and innovation is not injurious to health..."

I know Lindsay. I was just being "smart" and "pulling your leg" a little.

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