The Pay Czar’s Ethical Dilemma

Here’s an update on a not-so-new topic. It’s got lots of good stuff in it. Distributive justice. The public good. The weight of contractual obligations. The consequences of government intervening in (indeed, micro-managing) private enterprise. And so on…

From David Segal, for the NY Times: $100 Million Payday Poses Problem for Pay Czar

In a few weeks, the Treasury Department’s czar of executive pay will have to answer this $100 million question: Should Andrew J. Hall get his bonus?

Mr. Hall, the 58-year-old head of Phibro, a small commodities trading firm in Westport, Conn., is due for a nine-figure payday, his cut of profits from a characteristically aggressive year of bets in the oil market.

There is little doubt that Mr. Hall is owed the money under his contract. The problem is that his contract is with Citigroup, which was saved with roughly $45 billion in taxpayer aid….

I’m not sure I’ve got much that’s new to say on this topic. (Recall that I argued back in the spring that AIG should pay its controversial bonuses.) Segal does a good job of laying out the terrain, in the story above. I think really it comes down to the fact that Hall earned the money: he did what he promised to do, and so the money is owed to him. He didn’t ask for the bailout. (If you think he didn’t earn the money — perhaps because no one deserves that much money — feel free to suggest a generalizable principle for what that kind of work is really worth.) But hey, whether basic norms about meeting contractual obligations ought to hold in a situation like this really is a question of public policy, and this is just a business ethics blog. The question more relevant for this blog is the business question, namely whether the bonus should have been promised in the first place. Is $100 million too much? Well, that depends on whether the company involved, Phibro, is well-managed. It could be that it’s run by dummies making silly promises to pay silly bonuses for work that someone else, equally talented, would do for less. But minus evidence to that effect, surely the default has to be to let the company live up to its promises.

6 comments so far

  1. Bruno on

    Undoubtedly, honoring contracts is generally important. But why your unreasonable resistance to revisions? Are bonus contracts somehow different from credit agreements, which according to a new study are renegotiated in over 90% of all cases. The study shows what specific external circumstances can trigger these revisions:
    Roberts, M. R., & Sufi, A. 2009. Renegotiation of financial contracts: Evidence from private credit agreements. Journal of Financial Economics, 93: 159-184.
    Are you claiming pretty much all these contractual revisions are unethical because private desert always takes precedence over the consideration of changed external conditions? Why not take the public good as seriously as private desert? When old contracts do not make sense anymore, it’s time to renegotiate and/or rescind old/obsolete contracts. (Libby, with his unreasonable insistence on honoring obsolete bonus contracts under vastly changed, new circumstances, was ganz klar “AUS”: When a CEO doesn’t get this, he or she doesn’t deserve to be CEO.)

  2. Chris MacDonald on

    Dear “Bruno:”

    I’m not immune to changing my mind on this.
    I guess I’d just like to see some rationale for saying “No, that’s clearly too much,” which is what I suspect a lot of people are saying.

    Thanks very much for the reference to the Roberts & Sufi paper (of which I’ve only read the abstract so far). But it’s worth pointing out three things about that paper:
    1) It’s about renegotiations, not unilateral actions; and
    2) It’s about changes to contracts based on new information about the basis of the contract; and
    3) It’s not about third-party decisions to alter a contract. As I understand it, the story above is about the government (a third party to the contract between Hall & the company that employs him) stepping in to change the terms of a private contract.


  3. DarryleHuffman on

    The contract is not in question the question is if anyone should be able to make any amount of money they want. I would dare say that of someone offered someone chance to make millions in bonuses how many of them would negotiate a cheaper wage. I have yet to hear in my lifetime anyone say they want a paycut. Chris if you were asked to negotiate cheaper wage because people think you make to much what would you do? Thats what it boils down to. Would you force someone to negatiate cheaper wage after already negotiating the previous contract. I would walk away from the company. We got you for one salery we thought was right at the time now we think you are not worth that amount because it was may be percieved by others as to high. Not a good company to work for is company that would do that.

  4. Mark Edwards on

    “I have yet to hear in my lifetime anyone say they want a paycut”

    During economic downturns workers unions regularly agree to paycuts in the longterm interests of their members and the viability of their employing organisations. Its a pity people like Andrew Hall don’t have a similar sense of responsibility.

  5. Chris MacDonald on


    I’m confused… you say unions accept wage concessions “in the longterm interests of their members”… But your advice to Mr. Hall is a plea to his sense of responsibility…not to his long-term interests. So, what’s the relevance of the union example?


  6. […] Citigroup (#6) appeared in a blog entry called “Ethics in Banking: Best Practices”, as well as in a more recent one called “The Pay Czar’s Ethical Dilemma”. […]

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