[ExI] Restructuring executive compensation

[Dan]

--- On Tue, 6/2/09, Max More <max at maxmore.com> wrote:
> Dan Ust wrote:
>> I'm not sure those swings are endogenous to the market
>> economy.  In fact, there's reason to suspect on a
>> totally free market, there would be few if any total economy
>> swings, but only localized or at best secoral ones.
> 
> I'm not sure either, Dan. However, I'm certainly not sure
> that they are *not* endemic either. The problem is the
> currently-human tendency to imitate one another without
> adequate rational thought. (Just the kind of thing that
> worries Shiller.)

I think the best we can do here is try to have as free markets as possible, so there are strong incentives to not "imitate one another without adequate rational thought."  That said, though, I think the more free the market, the less likelihood there is to any "total economy swings."  Again, herds can form, but they tend to be localized to a sector or industry.  The kinds of swings we see today are, in my view, the result of government interventions, especially ones that directly impact the whole economy (e.g., inflation under central banking) or that severely reduce market flexibility (e.g., price controls, tariffs, import quotas, controls on branch banking, regulations of mergers).

> I definitely agree that government
> intervention has typically made the swings worse.

Yes, a point made time and again is that markets and other voluntary forms of interaction are NOT perfect, but government intervention (and coercion in general) does not improve on this.  The typical government intervention, though perhaps well meaning (not always, as big players tend to lobby for interventions that benefit them at the expense of everyone else and cover this with the rhetoric of good intentions*), only makes things worse even if it appears to help someone out.  (As with the broken window fallacy, the beneficiaries tend to be the center of attention while the victims -- "the forgotten man" of William Graham Sumner's essay -- are ignored or not even thought of.)
 
>> I'm not as well versed in this area as I'd like to be,
>> but from my studies the question to ask is why are certain
>> "compensation schemes" selected?  This has not been an
>> area of zero intervention and seems related not merely to
>> direct interventions in compensation (e.g., caps on payouts,
>> including the 1993 one you mention*) but also to the threat
>> of interventions...
> 
> Here's an example of how government involvement in
> compensation has led to unintended consequences (did I
> already mention this?): When the Clinton administration
> imposed a cap of $1 million on cash payouts to be eligible
> for corporate tax deductions, many firms shifted
> compensation to guaranteed bonuses, such as the
> controversial AIG payouts. Yet, you can be certain that most
> commentators will reflexively blame market-based decisions
> for this.

Actually, yes, you mentioned it.  Hence my parenthetic comment.

>> I would only want to see this plan [Dynamic Incentive
>> Accounts] voluntarily adopted -- and not adopted merely
>> because of either a legal mandate or the threat of such a
>> mandate.
> 
> Me too, in case that wasn't clear.

And I'd like to see firms free to try other plans as well.

Regards,

Dan

*  Think of the recent bailouts.  The rhetoric offered up was these were needed to save the whole economy; the truth seems to be these were needed to save the big banks, GM, their investors, and the management of these firms.  In the long run, them suffering huge losses or even going under would have been a better lesson for all concerned: manage your firms better.