Archive for the ‘pay’ Category
Profiting from Prison Labour
Is it right for a company to use convicts for cheap labour? Is it unfair to pay prisoners less than the minimum wage? Is it wrong to use such labour in a way that displaces “ordinary” employees?
The Guardian recently ran a story about prisoners doing work for a private telemarketing company in a way that may (or may not, depending who you ask) be taking jobs away from law-abiding folks. The prisoners in question are being paid the equivalent of about four and a half dollars an hour — just a fraction of the legal minimum wage.
Prison labour is a great topic, ethically, in part because it tends to make people of just about all political stripes uncomfortable, albeit for different reasons. Some worry about the prisoners, who may have little option but to accept whatever crummy labour comes their way. Others may have the opposite worry: why coddle criminals by giving them the benefit of a job or job training? They’re in prison to be punished, not to learn skills. Still others worry not about the prisoners at all, but about the non-prison workers who are displaced by prisoners who inevitably “underbid” them for jobs. You could add to that list the businesses who don’t use prison labour, and who are therefor at a competitive disadvantage. How can you compete when your competitor’s labour costs are half what yours are?
We’ll leave for others the basic question of whether, or under what conditions, penal labour is itself justified, and instead focus on the business ethics issues. And as far as I can see, from that point of view there just isn’t a problem.
The “law-abiding” workers put out of a job have every right to complain, but that’s not to say that they have a justified complaint; they haven’t been wronged in any way. Other things being equal, no one has a right to any particular job. The worker who finds herself out of a job because she’s been underbid by cheap prison labour is no more treated unjustly than the worker underbid by cheap labour overseas. (For that matter, the prisoner arguably needs the job more than the average UK worker does, as does the worker overseas.) If I needed a plumber and found one who charged $100/hr and another who charged $50 an hour, the more expensive one would have no cause for complaint if I opted for the cheaper. It is reasonable, and not unfair, for me to try to keep my costs down.
Nor can a competing company rightly complain. A company reaps no unfair advantage by using prison labour. Sure, it reaps an advantage, but not through anything underhanded. As long as prison labour isn’t acquired by fraud or by, say, bribing or pressuring officials in the justice system into making decisions that violate their sworn duties, then prison labour is just another form of cheap labour. From an economic point of view, they’re to be congratulated for innovation. As long as other companies have the option of obtaining (or competing for) access to the same cheap labour pool, there’s no injustice here.
There’s an important lesson here about what counts as an “ethical issue.” The use of prison labour is, to be sure, an ethical issue. There are important rights at stake, and the decision to use such labour has important consequences. Such being the case, the decision and the details are not to be taken lightly. But that’s not to say that the practice itself is unethical. It is not, in and of itself, unjustified. But it is still good and socially healthy that the practice gives so many of us cause to pause and reflect.
Healthcare, Unions, and Selling Donuts to Canadians
Filed under: compensation, employees, health, pay, unions, virtue, wages |
Leave a comment Selling donuts to Canadians sounds so easy that it seems like the punch-line to a not-very-funny joke.
Apparently, however, it isn’t always such and easy thing to do. Or at least, not easy enough to support paying double the minimum wage to the people who serve the donuts. Witness the case of the three Tim Hortons kiosks at Windsor Regional Hospital (in Windsor, Ontario, just across the border from Detroit, MI). At Windsor Regional, the donut-and-coffee kiosks are a big drain (to the tune of a quarter-million dollars a year) rather than a source of revenue. Part of the reason, apparently, is that the servers who work there are paid over $20/hour — far above Ontario’s minimum wage of $10.25. The kiosks are in effect being driven under by their own employees.
Part of the complexity of this story lies in the fact that the donut kiosks in question are at a hospital. So this isn’t just a question of a profit-hungry capitalist at odds with unionized employees. The cost overrun in this case is borne by the hospital, a not-for-profit organization that must recoup the cost in other ways.
The donut kiosks, along with other food service outlets at the hospital, are part of the organization’s overall operating budget, part of the overall cost of providing healthcare to the people in the hospital’s catchment area. As Canadian health economist Robert Evans has often pointed out, every dollar spent on healthcare is a dollar of income for someone. The result is that there are plenty of people — some wealthy, and some not so wealthy — with a vested interest in not reducing the cost of healthcare. That’s not a matter of malice; it’s just a matter of math.
But of course, the salaries of unionized employees can only be part of the tale, here. If the three kiosks have, say, two employees on duty at a time, then paying each of them only minimum wage would still only save about $120,000 — which accounts for less than half of the shortfall. So it doesn’t make sense to point to the workers’ wages as “the” cause of the problem. The supply of donuts and coffee at Windsor Regional simply seems to be out of line with demand.
Of course, one way out would be for the coffee kiosks to raise their prices. That may or may not be permitted by Tim Hortons’ franchise agreement. But anyway, raising prices would mean pushing the burden onto patients and their families along with hospital staff. And at most hospitals, the on-site food outlets have a virtual monopoly, which puts customers at a serious disadvantage. It also means that demand at a hospital is less elastic, which means the hospital kiosks have more power to raise prices than a non-hospital donut seller would. And if you believe that the wage currently being paid is a fair one (by some measure), then that’s what should be done. They should raise prices to benefit employees at the expense of patients, families, and staff.
All if this just illustrates that idealism about fair wages has its limits. In a world of limited resources — i.e., the world we live in — giving more to one person often means taking more from someone else. The result is that you can’t argue for higher (or lower) wages without talking about prices. Wages are part of an economic system, and discussions of justice in one part of that system can’t ignore justice in the others.
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(Thanks to Prof. Alexei Marcoux for pointing out this story to me.)
The Complexity of Executive Compensation
Filed under: accountability, boards, CEOs, compensation, consultants, governance, pay, regulations |
Comments (2) Many jurisdictions have moved recently to give shareholders a “say on pay,” which typically means that companies are required to hold advisory (i.e., non-binding) shareholder votes on compensation. In other words, establishing executive pay remains the responsibility of the Board of Directors, but shareholders are given an opportunity to voice their approval or disapproval.
The Wall Street Journal recently reported that when given their say, shareholders at a resounding 98.5% of American companies have said “yes.” So it seems that, thus far, shareholders are hesitant to challenge Boards in their compensation decision-making.
This is not surprising, given the complexity of the decision that Boards face in setting executive pay. Setting executive pay is a task typically delegated to a Board’s “Compensation Committee.” Now consider the task faced by a Compensation Committee in establishing the total pay-and-incentive package offered to their CEO.
The question facing a Compensation Committee is this: what combination of cash, bonuses, equity, and perks should we put on the table in order to inspire our CEO to perform optimally? In practice, this is a pretty complex question, one not admitting of cookie-cutter solutions. A Comp Committee needs to consider, just for starters:
- pressures from shareholder (and other stakeholders),
- pressures from proxy advisory firms and various think-tanks,
- human psychology, including their particular CEO’s character and motivational levers,
- the managerial experience and expertise of Committee members,
- corporate objectives (profit, market share, sales, social responsibility, etc.),
- their company’s ‘risk appetite’ (roughly speaking, are they trying to incentivize their CEO to be bold, or conservative?),
- expert opinion about optimal compensation structures (which is deeply divided, to say the least).
The problem here is as much one of epistemology as it is one of ethics. Compensation Committees need to take an enormous amount of information and opinion and distill it into a decision that will work and that will be defensible in the face of enormous scrutiny.
Of course, there is no shortage of compensation consultants, ready and willing to help Compensation Committees with this task. But recent (not-yet-published) research at the Clarkson Centre suggests that many corporate directors are skeptical about the value of compensation consultants.
Given this complexity, it’s not surprising that shareholders — even sophisticated institutional shareholders — are so far pretty hesitant to do much second-guessing. Whether or not that’s a good thing is a separate issue.
Executives and their Income
Filed under: CEOs, compensation, contract, employees, finance, governance, pay |
Comments (11) I’ve blogged a number of times about what is commonly and loosely called “executive compensation.” The term is woefully imprecise. In point of fact, most “compensation” is not, in fact, compensation. The carrot dangled in front of a horse is not compensation; it is motivation. Compensation is what you give someone after the fact as reward for a job well done, or at least for a job that met contractual requirements. If I hire the neighbour’s kid to mow the lawn, and he does so, then I should compensate him. Most of the money garnered by senior executives at publicly-traded companies these days is not, in fact compensation. It’s money they get from selling shares in the company, shares granted to them as part of an effort to align their interests with the interests of shareholders.
The looseness of use of that word in the realm of finance is not at all unique. Witness the “bonuses” paid to AIG employees two years ago, which were not in fact performance bonuses at all but rather retention payments designed to keep key employees on what seemed at the time to be a sinking ship.
See more recently this piece by Peter Whoriskey for the Washington Post: With executive pay, rich pull away from rest of America. Here’s just a taste:
The top 0.1 percent of earners make about $1.7 million or more, including capital gains. Of those, 41 percent were executives, managers and supervisors at non-financial companies, according to the analysis, with nearly half of them deriving most of their income from their ownership in privately-held firms….
Notice that (contrary to the article’s title) the key factor in the growth of executive income here is not in fact “pay.” The key factor is investment income. And it’s not even “pay” in the loose sense of ‘money given by an employer,’ since there’s no indication here what portion of that investment income comes from shares in a CEO’s own company, say, versus a diversified portfolio. But it’s hard to hold Whoriskey to blame for the linguistic imprecision here; confusing pay and compensation and income is altogether standard.
The other point to be made here is about justice. According to Whoriskey, “…executive compensation at the nation’s largest firms has roughly quadrupled in real terms since the 1970s, even as pay for 90 percent of America has stalled…” Setting aside imprecision of language, that suggests a significant disparity — not disparity of outcomes (which are a given, here) but disparity of rate of improvement.
Now according to Leslie McCall, a sociologist quoted in Whoriskey’s story, people become concerned about such inequality “…when it seems that extreme incomes for some are restricting opportunities for everyone else.” And that may be true about people’s reactions. But of course, it’s very hard for people to tell when it is actually the case that extreme incomes for some are restricting opportunities for others. As economists often point out, income is not a fixed pile, waiting to be handed out. The way you distribute income actually changes the size of the ‘pie’ due to the way money incentivizes. Incentivizing executives with stock and stock options may on the whole be a failed experiment, but that doesn’t change the fact that it is impossible to know whether the average worker would be better or worse off had those incentives never been offered.
Roger Martin on Executive Compensation
Filed under: CEOs, compensation, corporations, governance, leadership, pay, shareholders |
Leave a comment Yesterday I attended the Annual Meeting of the Canadian Coalition for Good Governance, along with a handful of colleagues from the Clarkson Centre for Business Ethics.
The meeting’s keynote speech was given by Roger Martin, Dean of the Rotman School of Management. (Disclosure: I am a Visiting Scholar at Rotman.)
Martin’s speech was basically a summary of the key ideas from his new book, Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL. (I mentioned Martin’s book a few weeks ago, in a blog posting called Business, Football, and Incentives.)
Here is a rough summary of what he had to say, paraphrased and condensed:
Prior to the mid-70’s, stock-based compensation for CEOs was rare. But starting especially in the 80’s, it became very common indeed. Martin traces the sea change to a famous paper by Michael Jensen and William Mecklin, called “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure” (PDF here). The basic idea at the time was that paying senior executives, and especially CEO’s, in company stock or stock options would align their interests with those of shareholders. Shareholders naturally want the value of stock to rise, and paying CEOs mostly in stock gave them a very concrete reason to want stock to rise, too.
It was a fine theory, says Martin, but it didn’t work out well. If you compare the era of stock-based compensation to an equivalent period before, you see that returns went down about 15% and stock volatility went up about 15%. Those definitely aren’t the kinds of results that shareholders were looking for.
And yet somehow people still cleave to the idea that stock-based compensation aligns interests. Why?
It’s clear enough why CEOs themselves are fans of the system. The reason, according to Martin, is rooted in the fact that stock prices only reflect the market’s collective expectations about a company’s future performance. That means in order to boost stock prices (and hence their own compensation) CEOs merely need to boost expectations. So, says Martin, that’s what CEOs have learned to do: manage stock analysts’ expectation, rather than managing actual performance. If analyst expectations are low when stock options are granted, and high when they get cashed out, a CEO stands to make a lot of money, independent of what that variation means in terms of actual performance.
But of course, says Martin, CEOs have realized that you can’t play that game for very long. So, they learned to look for opportunities to play a hit-and-run version of the game: get in, play hard, and cash out. That, he says, is the real reason why the average tenure of CEO is so short these days.
Is this malfeasance on the part of CEOs? Not really, says Martin. It’s just CEOs doing what they are payed — incentivized — to do.
Now, says Martin, compare this situation to the way quarterbacks are payed in professional football. Professional quarterbacks, he says, are paid for real, on-the-field performance. Additionally — and this is crucial — they are forbidden from profiting from outsiders’ expectations of how they will perform, i.e., from gambling on the outcome of the games they are playing in. Why? Because professional football leagues realize that letting quarterbacks gamble would give them all kinds of perverse incentives. The corporate world, it seems, has something important to learn from the world of pro football when it comes to incentivizing key personnel.
In the corporate world, says Martin, the only ones with something to gain from having stock-based executive compensation are CEOs and hedge funds. Both, he says, benefit from volatility of stock prices.
Martin’s prescription: performance-based compensation is fine. But don’t reward CEOs based on stock prices. Reward them based on real performance, in terms of something like earnings or sales or market share — different systems will make sense for different companies with different strategic objectives. But the point is to reward them for something more real than merely meeting the expectations of analysts.
It’s a provocative thesis, and a bold prescription. To say that stock-based compensation is “standard” is an enormous understatement. And Martin acknowledges that change, if it comes at all, will not come quickly. But given how widely-agreed-upon it is that current modes of compensation are not working, bold prescriptions may just be what is in order.
Shoe Shine Ethics, Again
Two months ago I blogged about the Ethics of Shoe-Shine Pricing, based on my experience at an airport shoe-shine stand. I was particularly interested in the relationship between base price and tipping behaviour. I noted that pricing decisions by businesses might well have a substantial impact on customers’ tipping behaviour, by making it more or less convenient, for example, simply to “round up” to the nearest dollar (or currency denomination). Case in point: I was charged $6.75 to have my shoes shined, and gave the guy a ten. It occurred to me that, had the price been $8.00 instead, I would have given the guy the same ten, but the resulting tip would have been substantially smaller.
Well, I’m back at the airport, and just had my shoes shined. And guess what: the price has gone up. I was charged $8.00, and, yes, as predicted I gave the guy a ten-dollar bill and told him to keep the change. In other words, rather than tipping on any principled basis, I did what was convenient. I suspect the vast majority of customers do the same.
Whoever decided to raise the price from $6.75 to $8.00 may not have thought about a couple of secondary effects of that decision (not that consciousness of these effects would necessarily have altered the decision). One secondary effect is that he or she reduced employees’ tips by $1.25 per shine (assuming most people tip roughly the way I do). That’s a big cut, big enough that it probably ought not to be made thoughtlessly.
The other effect of this pricing decision is of course the effect on the customer. The obvious effect is that a shoe-shine now puts a slightly larger dent in the customer’s wallet. But then, an airport shoe-shine is pretty clearly a luxury good (if a very minor one), and so it’s pretty easy to avoid the price change simply by forgoing the service. But less obviously, the customer now finds it slightly less easy to engage in a minor act of beneficence, namely the act of overtipping. Note that, back when the price was $6.75, my $10 payment amounted to nearly a 50% tip, which is crazy when compared to the 15-20% that most people aim at in response to good service at a restaurant. But shoe-shine customers who are anything like me are still going to do the easy thing (i.e., give the guy $10), even after the change in price. My evidence here is purely anecdotal, but I suspect that people generally value being handed the opportunity to engage in small, reasonably pain-free acts of kindness or generosity. I must admit that, back when I was charged just $6.75, I felt kind of good about having given the guy a “big” tip (percentage-wise) and it made me feel good about the whole shoe-shine experience. Today, the $8 shoe-shine cost me exactly the same (after tip), and the service was just as good, but I went away without that warm-and-fuzzy feeling, having given the guy a “mere” 25% tip.
It’s interesting to note that the ethics of pricing is virtually virgin territory, from an academic point of view. There’s practically nothing on the topic in the scholarly literature on business ethics, aside from a few journal articles on price gouging, a some stuff on price fixing in textbooks, and of course a bit of work on the pricing of executive talent. I’ve always assumed that the paucity of work on the topic has something to do with the fact that pricing is seldom seen (from the outside, at least) as a choice. In theory, at least, companies charge “what the market will bear,” and that tends to mean a number dictated by a combination of consumer demand and the availability of competing products. But for many products, pricing is in fact a choice, and I think the ethics of pricing is far more complex and interesting than most people realize.
Ethics of Golden Handshakes
Filed under: boards, decision-making, employees, governance, leadership, pay, stakeholders |
Comments (2) When an executive leaves in disgrace, what does the organization owe him or her? How should a Board handle such situations? In some cases, contractual obligations may seem to settle the matter, but contracts can be contested. Should they be? Does the IMF’s Dominique Strauss-Kahn deserve a quarter million dollars?
For further food for thought, see this story, by Tom Hals and Dena Aubin, for Reuters: Strauss-Kahn severance revisits CEO pay dilemma
The IMF now faces a challenge that keeps members of corporate compensation committees up at night: explaining why they may have to pay a handsome severance package to an indicted executive.
…
Former International Monetary Fund managing director Dominique Strauss-Kahn, facing charges of attempted rape in New York, resigned his post from the global lender on Wednesday.Strauss-Kahn’s contract entitles him to a one-time severance payment of $250,000, the IMF said on Friday….
Whether a Board of Directors should attempt to fight in order not to pay severance to an executive who has brought disgrace upon the organization is clearly going to depend on the circumstances. But it serves as a good example of the conflict between two different styles of moral reasoning. On one hand, a Board thinking primarily in terms of consequences might well reason this way: “Look, we need to get past this unfortunate incident. Let’s pay this guy the money his contract says he is owed, and be done with it. It’s better for the firm, overall, if we pay and get this finished.” On the other hand, a Board might think primarily in terms of justice: “This guy has brought shame (or at least notoriety) upon the organization. He doesn’t deserve a dime. We should fight for what’s fair.”
The tension between these two styles of moral reasoning is an ancient one, and it’s perfectly reasonable to find something attractive in both styles of reasoning. But the fact that both kinds of reasons might occur to a single group of people — a Board of Directors — in a single situation implies an interesting question. Even if we were to agree (even for sake of argument) that a Board of Directors’ main obligation is to serve the interests of the organization and its shareholders, that still leaves open this important question: should a Board of Directors seek the best outcomes for the organization and its shareholders, or should it seek justice for it and for them?
Wage Negotiations, Transparency, and Justice
Ontario’s public-sector unions are up in arms, over a secret deal granted by the government to one particular union. All of the province’s public-sector unions were to receive just a 2 per cent raise for 2012, part of an austerity plan aimed at taming the province’s multibillion-dollar deficit. But one union, the Ontario Public Service Employees Union, was secretly given a 3 per cent raise, “in exchange for non-wage concessions.”
See the details here: Employers up in arms over Ontario’s ‘secret’ wage deal, by Karen Howlett for the Globe and Mail.
The generosity of the deal is in sharp contrast to the McGuinty government’s pronouncements on the need to rein in spending in the public sector as it grapples with a multibillion-dollar deficit. Its flagship restraint measure consists of a voluntary two-year wage freeze for public sector workers who bargain collectively.
Against this backdrop, revelations that a sweetened deal was reached in December, 2008, for a union that often sets the benchmark has upset many employers in the sector….
For my purposes, the fact that the employer in question here happens to be a government is entirely beside the point. An employer is an employer, and this story could in principle have happened in the private sector.
Now, there’s an interesting side-issue here about whether limits expressed in terms of percentage points ultimately make much sense: we don’t know what “non-wage concessions” the government got from OPSE in return for the extra 1%, but it is entirely possible that it is something better for provincial coffers, in the long run. The non-wage benefits that unionized workers enjoy often amount to a large portion of their total compensation. But as I say, that’s a side issue. Wages per se have a special salience in labour negotiations, both because of their immediate impact on workers’ pocketbooks, and because of their symbolic significance.
The key ethical issues here have to do with transparency, and whether other unions have a right to know the details of one particular kindred union’s negotiations with the employer they share in common. There are reasons for and against transparency. On one hand, a reasonable level of transparency is essential for benchmarking, and knowing how much other groups are earning is a precondition for seeking wage parity. In that sense, transparency serves justice. On the other hand, wanting to know how much someone else makes is not the same as having a right to that information. An argument needs to be made that having such information serves an essential purpose. Also, more generally, such benchmarking can have a tendency to ratchet salaries upwards, sometimes pushing compensation higher than is warranted either by performance or by the law of supply and demand.
Equally interesting is the government’s (i.e., the employer’s) rationale for the secrecy:
“By bargaining hard, the government protected taxpayers,” said Geetika Bhardwaj, a spokeswoman for Government Services Minister Harinder Takhar. “That has one union upset because they wanted more from taxpayers and didn’t get it. We make no apologies for that.”
Two things are worth noting about this rationale:
The first is that, taken seriously, it justifies entirely too much. No behaviour is beyond the pale, so long as it saves taxpayers a few bucks.
The second thing worth noting about this rationale is that it makes plain an important truth: spending a budget is a zero-sum game. Many people treat “a good deal for the working man” as an unqualified good. But in government, as in business, every dollar in an employee’s pocket is a dollar taken out of someone else’s pocket. That’s as true for Walmart or GM as it is for the Government of Ontario.
Ethics of Shoe-Shine Pricing
Filed under: decision-making, employees, marketing, pay, pricing, profits, wages |
Comments (6) 
A few days ago at the airport I stopped to have my shoes shined professionally, something I rarely do. The service was excellent. The guy doing the work was pleasant and knowledgeable, and the results were beautiful. The price, revealed at the end of the process: $6.75. I gave the guy a ten, and told him to keep the change. Now, that’s not exactly enough to make me think I’m a big spender, but it’s pretty good, percentage-wise (nearly a 50% tip). The guy sitting next to me did the same thing, by the way, and I’m betting that’s actually a pretty common pattern.
This got me thinking about the relationship between pricing, tipping, and currency denominations. If the price of the shoe-shine were $8.00, most people likely would still give the guy the same $10, resulting in a substantially smaller tip. But if the price were closer to $5, I bet most people would pull out a $5 bill and then looked for some change to add as a tip. So whoever sets the basic price for the shoe-shine has enormous power to influence the size of tips.
Now, the guy who shined my shoes was wearing a shirt bearing the logo of a chain of shoe care-and-repair stores, so I’m guessing he wasn’t setting his own prices. This implies that the company he works for, in addition to making a decision about his base pay, is also, through its pricing policies, making a decision that likely has an even bigger impact on his income. Of course, that decision is not entirely unrestricted. The company in question has to cover its costs. But presumably it has different pricing strategies open to it. Crudely, it can set prices high, which will likely keep demand down but will result in a big per-sale profit margin; or the company can set its prices low, and rely on volume. Either strategy might make economic sense. If (and that might be a big “if”) both strategies have the potential to work out equally well for the company, that means the choice is open, and the potential is there to base pricing on whichever strategy will do the most for employees in terms of providing customers an incentive for large tips.
(Another example: any bar manager that sets the price of a beer at $4.50 is pretty much ensuring that wait-staff are going to get lousy tips — the temptation for many people is going to be to plunk $5 onto the bar, resulting in a tip of 50 cents or 11%.)
But the factual foundation of this question, beyond my own anecdote, is all speculation on my part. I’ve never had a job where I relied on tips. Can anyone shed any light on the relevant facts, here? And does anyone know whether incentivizing tipping is something companies ever take into consideration in their pricing decisions?
Regulating Wall Street Bonuses
Filed under: accountability, competition, decision-making, employees, finance, government, pay, regulations, wages, white collar crime |
Comments (5) The U.S. Securities and Exchange Commission has just announced its intention to exercise oversight over levels of pay on Wall Street. Is this an example of overreaching regulation, or of justified intervention in the public interest?
Here are the details, from Ben Protess and Susanne Craig, on the NYT‘s DealBook blog: S.E.C. Proposes Crackdown on Wall Street Bonuses:
Lavish Wall Street bonuses, long the scorn of lawmakers and shareholders, have met a new foe: the Securities and Exchange Commission.
The agency on Wednesday proposed a crackdown on hefty compensation awarded at big banks, brokerage firms and hedge funds — a move intended to rein in pay packages that encouraged excessive risk-taking before the financial crisis.
The proposal would for the first time require Wall Street firms to file detailed accounts of their bonuses with the S.E.C., which could then ban any awards it deemed excessive. The rules would be aimed at top executives and hundreds of rank-and-file employees who receive incentive-based pay….
In general, we should probably have as our starting point a healthy skepticism about government attempts to regulate pay in particular industries. Remuneration for high-level jobs is typically based on some combination of rewarding past performance and incentivizing future performance, in addition to sensitivity to things like skill, experience, and the scarcity of the particular talents the job requires. And it’s highly unlikely, again speaking in generalities, that government agencies are going to have the right information and motives to allow them to determine with any degree of precision and efficiency just what a private company’s pay structure should be. Now of course governments aren’t the only ones who could err in setting up compensation schemes; private companies are perfectly capable of screwing that up pretty badly themselves. But for the most part, if private companies screw up in that regard, it’s their shareholders that should hold them accountable, just as it is shareholders who ought to hold them accountable for any other foolish spending.
But there are likely to be justified exceptions to the general presumption in favour of the government taking hands-off approach to compensation. If it is the case — and this seems to be the S.E.C.’s conclusion, here — that compensation schemes in a particular industry are seriously and chronically causing harm beyond the walls of the organization, that seems to be a pretty good argument in favour of government action. This is especially true when the damage being done is not “merely” damage to particular individuals or groups, but to the stability of the economy as a whole. And as Protess and Craig point out, “The move by regulators to have more say on Wall Street pay highlights the huge role financial institutions play in the economy.” That is what arguably makes the harm done by Wall Street compensation not just a matter of private wrongs, but of public ones.
But of course, this argument doesn’t mean the S.E.C. should rush in like a bull in a china shop. All of the concerns mentioned above still apply — there are reasons why Wall Street firms have the compensation policies they have, and it’s pretty likely that at least some of those reasons are pretty good ones related to the necessities of the industry. Indeed, the S.E.C.’s chairwoman, Mary L. Schapiro, says that “This is an area where we want to be very attuned to unintended consequences.” The S.E.C.’s objectives here, seem to be good ones; the question will be whether the quality of the agency’s methods live up to the nobility of its goals.
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