It’s been a crazy couple of weeks. The government is going for it. Obama is going for it. This is his chance to be a hero, or a goat. Depending on what else comes his way during his presidency, how he handles this financial crisis, and how the country rebounds, will largely define his legacy. In recent weeks, salary caps have been imposed for wall street executives, select homeowners are being bailed out and US automotive manufacturers have submitted their viability plans. I thought I would chime in and say a few words on each topic.
In my opinion, executive pay caps are a bad idea. I understand the rationale. If you’re taking bailout money, the government has the right to attach some strings to it. That being said, this is private industry. A business has a right to decide what to pay its people. The government should stay out of this. Plus, you’re limiting the talent you can bring in to help fix the problem. Perhaps the market values someone with the ability to guide a company through this type of crisis at more than $500k. When it comes to banking, this is surely the case. The top talent will stay home rather than work for an amount less than they could be making somewhere else. Plus, there’s a system in place that already sets prices – the market. Competition should set prices for labor. If company A will receive a higher value from employee X’s services than company B, company A will be willing to pay more. If X ends up working for company B because pay caps restrict what company A can pay, X will be underemployed and the market will be inefficient. I say let the market work.
As for the auto viability plans, GM and Chrysler are asking for money again. Their argument is that they’re only asking for a few billion here and there, which is very little compared to what a bankruptcy filing would cost. Maybe that’s true, but it sounds like a sneaky way to go about asking for money. When does it end? According to this article, the automakers will have their hands out for awhile. I think long term we are making American industry weaker by propping it up. Let the companies pursue private solutions. If there is enough demand for cars in the US – let other companies take advantage of the infrastructure GM, Chrysler and Ford would potentially vacate. Let the market dictate who survives. Instead of forcing these companies to adjust to the marketplace, we’re attempting to adjust the market place to them. Will letting these companies fail hurt? Of course. In the short term, it will be devastating. It will be unpopular, expensive, and demoralizing. In the long term, however, the companies that emerge from the crisis will be built on strategically competitive principles that will make America strong again.
I don’t know what the future holds. I don’t know how to fix America. If I did, I would publish it here, and anywhere else someone would let me. Many, many people know more about economics than I do. That being said, as I look around me at what’s happening in America, I can’t help but wonder, whatever happened to the free market? When did we come up with a theory that works better? If we did, could someone explain it to me and give me an example of somewhere it’s been successful? I don’t mean to be snarky. That’s not my intention. I just want to understand what’s going on. Thanks for reading.
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Todd,
I could not agree with you more. We must let market forces work if we are to compete in the long run. If GM does not fix its business model, all the federal money in the world will not solve their problems, it will only prolong the decline. Letting legislators into biard rooms is a huge mistake…. when have they ever had to make a payroll, or even make a tough firing decision. Now they are calling for private business (the banks) to lower interest rates on some of the bad debt. Are we still in America,? When I was a kid (40+ years ago), everyone would say, don’t let the government run it, if you do it will be all messed up and they would point to many government failures. Today people think ONLY the Governemnt can fix the problem, and when government failures are pointed out, they claim that is because they did not have enough money! WHen you fail, like in public education, instead of scrapping the plan, they just jive the failing department MORE money. We need a return to individual responsibilty and common sense. They also used to say that ” A Statesman thinks about the Next Generation and a politican thinks about the next election” – Where have all the statesmen gone?
Great post.
While I agree that the government should not be imposing salary caps, I don’t think these executives are adding the value that these wages imply. If someone is unwilling to work for less than $50 million/year they are in it for the wrong reasons – but maybe banking is unique in this regard.
However even in other industries, executive pay is often many orders of magnitude higher than the company’s average employee – this enormous gap implies the executives possess some god-like power and add disproportionately more value than lower ranking employees. As Jim Collins discusses in his books Good to Great and Built to Last, leaders should be building clocks and not telling time. Companies that follow the “one-great leader” approach are likely to do worse than companies that focus clock building.
Taking the automotive industry as an example, the compensation of the CEOs from GM, Chrysler and Ford are significantly higher than those of the far better performing Honda and Toyota.