Wednesday, November 28, 2012

Crazy Compensation

Here are a few articles about compensation/finance/economics:
As I've said before, I have no problem with people making a ton of money. What bothers me is when people make money that is way out of whack with the value they bring to their organization and/or society. Kobe Bryant makes millions, but he has performed at a high level for a long time and is a major part of why the Lakers have won multiple championships and why the NBA makes so much money. Sergio Marchionne deserves his millions for bringing Chrysler from bankruptcy to profitability. He helped save a company, and thus tens of thousands of jobs.

On the other hand, just as there are pro athletes who bring no value to their teams in return for multi-million dollar contracts, there are corporate executives who make a ton of money for either presiding over a failing company, or successfully gaming the system. My theory is that most people aren't bothered by people making a ton of money if they bring value. What gets people annoyed is seeing some no-talent at the end of the bench who will make more in a year than the best 2nd grade teacher in the country will make in her career. Similarly, people hate to see a CEO make millions for driving a company to ruin.

As an economy, we should find ways to drive down the number of people who make tons of money without providing commensurate value.


yatesc said...

Couple things.

First... that no-talent at the end of the NBA bench? He's one of the top ~500 people IN THE ENTIRE WORLD at what he does, and there are a LOT of people engaged in that profession. Not to knock our teacher, who is undoubtedly good at their job, but the worst NBA player in the league is better at his job is quite likely much better at playing basketball than they are at teaching. Ain't his fault he works in a field that's much more lucrative. Compensation isn't based on value to society. (Which is a good thing on some level, as I'd be broke.) (As would the telephone sanitizers.)

The problem is partly executive pay, insofar as it's part of the income disparity problem. Ideally more CEOs would be compensated like the head of Costco. But I think solving that problem is inextricably linked to the problem of how businesses are run, targeted squarely on Increasing Shareholder Value Tomorrow. It leads CEOs to do stupid things for their business to get Shareholder Value on Thursday, and to try to extract as much compensation as they can for doing so, because who knows if they'll be employed there on Friday?

Ideally the marketplace would solve these problems, but it doesn't appear to be working. I think we need to alter the playing field... we need to change how we regulate and tax businesses to encourage the behavior we want to see: growth over the long term, not rapine and greed in the short term.

reston kid said...

On the no-talent: I totally get that, but there are many pursuits for which the top 500 people in the world don't make 7 figure salaries to suck. If the no-talent at the end of the bench had compensation that was tied to what he could actually do for his team, then that would be better.

On executive pay, I totally agree (check out the last article I linked to). Fixing the playing field is what has to happen.