Monday, February 29, 2016

Pointless or Destructive

NOTE: I am copying sixteen essays from my old blog ("Random Notes") to this blog. Some are cited in other essays, but most are simply essays that struck me as interesting while I was going through my search for essays to fix broken links.

I wrote earlier about how destructive the CEO compensation caps will be. However, I have not yet reviewed the law so they may just be pointless. It all depends on how the law reads.

You see, if the law caps all types of payments, benefits, and everything else at $500K, that means these floundering companies, who most desperately need the best CEOs available to restructure them, get their business back on an even keel and point them int he right direction, will be competing for CEOs with companies which have no imposed caps, and so will get the bottom of the executive barrel.

On the other hand, if the law only caps explicit compensation,t hen we will simply see an increase in stock option, bonuses, and other non-monetary payments to CEOs in those companies. Just a spay caps in the Second World War eld to the birth of health and other benefits as substitutes for pay the companies could not offer, we will see companies participating in the bailout using non-monetary compensation as a way to get around the caps and compete for the CEOs they need.

There is a third option. They could simply work around the law. Even if it prevents the payment of competitive wages, they could simply hire a CEO at $500K per year, and then retain his wife, son or dog as a "consultant" at $200 million per year, and thus offer a competitive wage through the back door. Or else they could "buy" a pencil or lighter from the CEO for $100 million in addition to hiring him for $500K per year. Any number of such scheme exist which would comply with the letter of the law, if not the foolish spirit.

And it is a foolish law. I already explained this, but it is important enough I need to say it again. CEOs do provide a valuable service. They do not simply sit in a big office and collect pay as many in government think. (Are congressmen and senators projecting a bit when they imagine CEOs do nothing?) A good CEO can save a fortune, or bring in a fortune in increased sales. And if the company is large, a CEO can easily be worth many times his salary, even if he gets $100 million a year or more.

As I wrote before, it is akin to athletes and teachers. On a per student basis a teacher may be worth more, but an athlete can provide a service to millions, so even if he is worth only a dollar to each viewer, he makes tens of millions while the teacher, who can only provide service to twenty or thirty students, even if that service is worth thousands, only gets fifty or sixty thousand dollars at best. The same with a CEO. The boss of GE, because he is managing a company worth billions, can save or earn millions or billions, while even the best boss of  a corner grocery, because of his scope, can earn only tens of thousands. Thus, for big companies, it makes sense for the largest corporations to offer tens or hundreds of millions to attract only the best CEOs as they will be worth much more than that. If they offer only tens of thousands, it would make sense for those same best CEOs to manage grocery stores, and have far less stress for the same pay.

Why do so few in politics, or even among the general public, seem to understand this? They can understand that there are few top athletes so they make big money, so why can't they apply the same to business? Or they truly think corporate executive don't do anything? If so, why don't they apply for the job and see how easy it is?


This provides an interesting parallel to Obama's prohibition on "lobbying" jobs for those in his administration. As I said, it either is pointless as they will stay in his administration for four years, and thus will only leave after he is out of office, when the prohibition no longer holds, or else they will leave early and take a job, as did Tom Daschel, that is in effect a lobbying post, but is called something else. In either case, it will be a meaningless restriction.

Similarly, unless carefully crafted, this law will be largely ineffective. However, if it is carefully crafted, and much more airtight than Obama's prohibition, then it will destroy most of the companies the bailout intends to save. Either way it seems a particularly bad idea.

It is amazing how many such subterfuges exist in matters pertaining to government. For example, I worked for an American company wholly owned by a foreign firm. However, laws prohibited foreign firms from taking certain defense contracts. So, the foreign firm created an American subsidiary, and transferred ownership of my company to that subsidiary. Of course, the foreign company still owned us, but, thanks to that intermediary company, we now qualified for all those contracts. (Yes, there was some fuss about "independent management", but if this foreign firm really had espionage in mind, would they have not been able to find a dozen Americans willing to lie and form a shell company? Which makes the assurances of separate management pretty dubious security.)

And there are dozens of such lies required by the government. I worked for two different companies which had become "minority contractors" through the donation of stock to, in one case, a woman and in the other an Asian businessman. Neither one was truly minority owned, but on paper they then qualified for "set aside" contracts.(And it was a nice source of effort free income for the woman and Asian man in question.)

My question is this. The government must know such lies are happening all the time. So why do they keep passing such laws? If they know these laws will simply be circumvented by deceptive practices, what is the point? Other than making voters think they are doing things they aren't, I can't think of a single reason. Which does not cast politicians in a very favorable light.

Originally posted in Random Notes on  2009/02/04.

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