As Economy Tanks Executives Whistle Tunes Of The 1920s
Written by Michael Lewis on November 27, 2008
By Michael Lewis
If today’s economic implosion calls for innovation, why are key executives acting so 1920s?
Why do they seem insensitive to the modern audiences they play to and tone deaf to the tunes of the times, then dance out of step with the needs of the nation?
As the economy spirals downward, three cases in point:
nMiami-Dade’s new school superintendent finds a $125 million deficit. He proposes an immediate $89 million chop, lopping off 440 workers and cutting administrators’ pay up to 10% "starting at the top" — but excludes himself from everything.
nAs General Motors bleeds an astounding $181,000 per minute, its CEO zips to Washington in a corporate jet to plead for a $25 billion auto bailout. Though he concedes GM is as good as bankrupt, he won’t consider bankruptcy, which would cost him his job, or resign because he didn’t see "what purpose would be served." Of course, he won’t cut his own pay.
nAs huge layoffs occur daily, ex-Federal Reserve chairman Paul Volcker briefs Major League Baseball owners on the perils of the economy. Concurrently, teams are likely to hand two free-agent players $150 million each in multi-year contracts and two others $50 million each.
As financial pain and suffering spread globally, why does the top of the ladder so often seem insulated and immune? In the words of "Ain’t We Got Fun," the song that became the credo of the 1920s, "There’s nothing surer, the rich get rich and the poor get poorer."
What is lacking at the top is noblesse oblige, the age-old concept that those of wealth and position have a moral responsibility to balance their privileges with behavior that accepts a duty toward those who lack such status. We’d call it doing the right thing just because it is the right thing to do.
That complete unawareness of, or disregard for, doing right raises several questions:
nShould we set ceilings on pay and compensation in a capitalist world? Is some level too excessive when the economy is in a tailspin unseen in the past 70-plus years?
In the five years before this plunge, Charles R. Schwab collected $816 million in cash and profits from stock options in his firm, the Wall Street Journal found. Angelo Mozilo collected $471 million in making Countrywide Financial into a leading subprime lender that was sold this year amid huge losses — but he came out fine. Fifteen CEOs pocketed $100 million or more that way in the five years, not counting corporate holdings they retained.
nWould limits on pay, bonuses and other compensation stifle creativity? Don’t we depend on ultra-high rewards to fuel the engines of innovation, to add extra effort?
Actually, big bonuses may be counterproductive, not just because they strip an enterprise of resources but because they may not improve performance.
Dan Ariely, a Duke professor of behavioral economics, wrote in The New York Times last week that his experiments found modest bonuses more effective than large ones in stimulating effort when cognitive skills are involved.
If that carries over to big businesses, we’ve been using the wrong model for years. We are about to see if that’s so in scandal-wracked UBS and in Goldman Sachs, both of which just cut bonuses.
How many more home runs or baskets or touchdowns do we get per million dollars paid? Conversely, wouldn’t we get the same performance for $1 million as for $10 million, or are players who get paid less dogging it until they get bigger checks?
nIf we ought to limit pay, should we count on enterprises to set internal ceilings or must government set one?
Every tenet of capitalism argues against limits from anywhere. And government is surely the worst judge of how to encourage or reward innovation that increases profits responsibly.
Therefore, any limits ought to be internal. But example after current example shows internal disdain for moderation.
nWhere are the boards of directors, both public and private? The CEO of General Motors reports to a board. The school superintendent reports to a school board. Baseball teams report to a commissioner’s office. Where is oversight in the midst of excess?
New School Superintendent Alberto Carvalho, for example, is not rich, nor is his pay excessive. But he just got a $73,000 raise with his promotion. He says he won’t cut a penny because he should have gotten more. Legally, he’s within his rights to cut everyone but himself.
But this is where his board needs to apply hard pressure to spread the pain to the top today, just as it will be willing to spread largesse when money is plentiful.
In the case of General Motors, directors are finally hinting they might consider a painful solution that would conflict with Chairman and CEO Rick Wagoner. That might even include filing for bankruptcy.
A corporate plan due Dec. 2 in Washington should offer at a minimum to share the pain at the top.
So far, the only thing GM has done is plan to jettison two more jets, down from seven in September to only three in the midst of unprecedented crisis. It might take bankruptcy to whisk away the final three.
As for baseball, all it would take to trim salaries equitably is for owners to forget about bidding wars. They don’t have to collude. They just have to get as fiscally responsible as Florida Marlins owners, who are too cash-strapped to recklessly hand millions to players. It’s the one thing Marlins owners have done right.
As others have pointed out, sacrifice and symbols become more and more important as layoffs mount.
Recent presidential candidate Mitt Romney notes that his father George Romney, in the midst of a crisis when he headed American Motors, cut his own pay and personally bought stock in the company to pump in money. Where is that kind of noblesse oblige today?
Instead, Mr. Wagoner and his fellows from Ford and Chrysler showed up in DC via three corporate jets to seek US funds. Said New York Rep. Gary Ackerman, "It’s almost like seeing a guy show up at the soup kitchen in a high hat and tuxedo" — the corporate symbol of 1929 and the start of the Great Depression.
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