Executive Pay Isn't the Problem

[w¡n9Nµ7 §£@¥€r 123]

There are people who earn money, which is correlated to creating value in society, and there are people who earn money by creating money-making schemes, which don’t correlate to real value in society.

For example, if Bob builds your house, he’s paid as a symbol of the value he created for your life. On the other hand, if William creates and sells exotic (i.e. socially valueless) financial instruments, he’s paid lots of money, even though, in most cases, no value has been created.

Capping executive pay is a misguided remedial effort. If a company adds real value to society, people like Bill Gates and Steve Jobs should get wealthy. Unfortunately, our economic system is overrun with barely legal scams masquerading as businesses. In those cases, we can better protect the benefits of capitalism (and capitalism itself) by preventing such thievery from happening in the first place. Otherwise, we’re merely calling criminal activity by the more respected name of "capitalism".

Let's use a couple little examples which happened to screw our society at large: Enron and AIG (AIG).

The issue isn’t whether Ken Lay and his financial henchmen should have had their pay capped -- by that time, the dirty bomb had already exploded in the economic subway. The issue is whether trading energy derivatives had any value other than skimming money out of the system on the back of a valueless/harmful business model. As we all learned, Enron clearly didn’t do anything to add value to society. Quite the opposite.

More recently, the same adult game of smoke and mirrors occurred at AIG. Once again, prima facie criminals put on $5,000 suits, housed their scam in prime corporate real estate, and blinded their victims with big shiny logos.

In this case, the business model was to collect premiums to insure loans, yet never maintain any collateral to make good on the insurance claims. This is 100% the same as paying car insurance, having an accident, and learning the company had no money for your claim. Where does the money go in this model? The operators simply stuff it in their pockets. Skim, stuff, repeat (no time to rinse).

Coming full circle: Who cares about capping someone's paycheck midway through a giant project to hurt people who actually work for a living? While the iron is hot, let's surgically remove the cancerous businesses from our economy before we need another dose of chemotherapy. Then, we can finally see the value of capitalism as capital flows to the most beneficial uses.

http://www.minyanville.com/articles/execut...5149/from/yahoo

Edited October 28, 2009 by w¡n9Nµ7 §£@¥€r

[Trumplestiltskin 5,791]

Pay caps are just a visible symbol that the government is doing something, even though it has little real world effect on the underlying problems.

[Peikko 1,575]

I agree. I don't see the point in this at all.

Mind you, I don't see the point in the whole business of selling derivatives either - seems to me like selling the potential of profit endlessly is bound to result in someone ending up with an empty wrapper at the end.

[w¡n9Nµ7 §£@¥€r 123]

I agree. I don't see the point in this at all.

Mind you, I don't see the point in the whole business of selling derivatives either - seems to me like selling the potential of profit endlessly is bound to result in someone ending up with an empty wrapper at the end.

a.k.a. the bagholder

[AlHayatZween 2]

all those corporate punks should have their salaries capped and redistributed to the poor, the sick, the hungry.

the only one worth his weight in ducats is MaWilson... he is exempt from capping.

[scandal 951]

I disagree with the premise that you can differentiate between derivatives trading that "adds value" and that which does not. Clearly illegal scams, e.g. Ponzi schemes, are indeed illegal and are prosecuted as such.

However derivatives, even so called "exotic" ones, are used all the time for perfectly legitimate purposes. Trading, say, a calendar spread between Nov2009 and Jan2010 heating oil contracts, or a fixed for floating interest rate swap with payment streams over two years, can and does have real economic benefit. The former can be used by your local utility to hedge their exposure in the cash markets and ensure a consistent monthly utility charge for you the consumer. The latter can be used by a business receiving steady monthly cash flows and can pay a fixed stream but which has debts that float with LIBOR and need to pay a variable rate.

Of course, those same two examples (a commodities calendar spread and an interest rate swap) are also often used to speculate in the market. The naysayers like to point at speculators and claim that they are the bottom feeders who add no economic value. I disagree there too. Speculators add liquidity, aid in fair and open and rapid price discovery, and lower transaction costs for the hedgers and "legitimate" investors. Speculators, just like everyone else in the market, takes risk. Many of them work awfully hard to measure and control their risk. When and if they are able to profit by doing so, they've earned that income fair and square, just like everyone else in the system.

[moelarrycheese 0]

There are people who earn money, which is correlated to creating value in society, and there are people who earn money by creating money-making schemes, which don’t correlate to real value in society.

For example, if Bob builds your house, he’s paid as a symbol of the value he created for your life. On the other hand, if William creates and sells exotic (i.e. socially valueless) financial instruments, he’s paid lots of money, even though, in most cases, no value has been created.

Capping executive pay is a misguided remedial effort. If a company adds real value to society, people like Bill Gates and Steve Jobs should get wealthy. Unfortunately, our economic system is overrun with barely legal scams masquerading as businesses. In those cases, we can better protect the benefits of capitalism (and capitalism itself) by preventing such thievery from happening in the first place. Otherwise, we’re merely calling criminal activity by the more respected name of "capitalism".

Let's use a couple little examples which happened to screw our society at large: Enron and AIG (AIG).

The issue isn’t whether Ken Lay and his financial henchmen should have had their pay capped -- by that time, the dirty bomb had already exploded in the economic subway. The issue is whether trading energy derivatives had any value other than skimming money out of the system on the back of a valueless/harmful business model. As we all learned, Enron clearly didn’t do anything to add value to society. Quite the opposite.

More recently, the same adult game of smoke and mirrors occurred at AIG. Once again, prima facie criminals put on $5,000 suits, housed their scam in prime corporate real estate, and blinded their victims with big shiny logos.

In this case, the business model was to collect premiums to insure loans, yet never maintain any collateral to make good on the insurance claims. This is 100% the same as paying car insurance, having an accident, and learning the company had no money for your claim. Where does the money go in this model? The operators simply stuff it in their pockets. Skim, stuff, repeat (no time to rinse).

Coming full circle: Who cares about capping someone's paycheck midway through a giant project to hurt people who actually work for a living? While the iron is hot, let's surgically remove the cancerous businesses from our economy before we need another dose of chemotherapy. Then, we can finally see the value of capitalism as capital flows to the most beneficial uses.

http://www.minyanville.com/articles/execut...5149/from/yahoo

Good article. Right to the point

[NickD 203]

Ha, in my corporate days, really questioned if my CEO was worth 160 of me in terms of paychecks, just a guy, for most practical purposes, an idiot, but highly political. Certainly had enough butt kisses around, wasn't my style, maybe he respected me for that, but he was still my master and I was his slave and greatly affected my life and the time I could spend with my family. But man, did he have family problems, his kid was arrested for selling drugs.

We are suppose to live in a free country, but all corporations are dictatorships, true, you have a choice as to which dictatorship you want to work for, but they are all the same. Get in one CEO, let's make more money and do everything in house, next guy, let's lay off everyone and outsource what we need, all whatever they think that will make the stockholders happy. Let's concentrate on building up our company or let's buy companies that seem to be a threat or doing a better job than we are so we can screw them up and dump off better than half of their workforce. Let's push marketing or engineering, preferred the engineering, but those were rare.

Was made general manager of a division with strong promises of a great future for success, after working my butt off to get that success, my division was sold off to make the stocks look better, was really pissed off about that. So started my own business, screw them. None of these guys have a good crystal ball, world economy controlled by the governments have more say in that, but some were lucky, others were not, but all are way overpaid.