The right eloquence needs no bell to call the people together and no constable to keep them. ~ Emerson

Friday, February 6, 2009

The Needs of the Business

The company for which I work has not yet formally announced it will pay bonuses this year but most employees are hopeful, since we were profitable throughout the year and generally met or exceeded financial performance goals.

The company continues to deal with its own unique challenges, due to some bad decisions by senior management about a decade ago, and the current recession is not making it any easier to get by. As a result, it came as no surprise when the Senior Vice-President of Human Resources announced there would be no raises this year.

While some old-timers grumbled about happier times past, many of us were simply happy to have jobs. Whatever our personal situations and needs, raises were being withheld because of the “needs of the business” and this was a concept we all understood.

After all, nobody wants to increase their personal income at the expense of the continued existence of that income. Our only leverage is leaving the company in search of better opportunities. This is an unattractive prospect to most of us for a variety of reasons and we know there are plenty of competent unemployed folks out there who would love to take our places if we left. Therefore, we shut up, suck it in, and take one on the chin.

Thus, it struck most of us as delightfully fair when President Obama and Treasury Secretary Geithner announced their intention to imposed $500,000 caps on senior executive pay for the most distressed financial institutions receiving federal bailout money. In addition to the cap, the federal government imposed other restrictions as well.

The order bars the most senior executives from any severance packages if fired and severely limits the compensation of others, in an attempt to eliminate the “golden parachutes” so common among company officers of failed businesses.

Likewise, it requires boards of directors to adopt policies on spending for big-ticket items, such as corporate jets and entertainment, in order to prevent executives from disguising luxurious rewards to themselves as normal business expenses.

It expands the compulsion to “claw back” bonuses and other incentives for executives if those executives knowingly provided inaccurate information related to company financial statements or performance measurements. This addresses the way CEOs and CFOs all too often “cooked the books” to make companies appear more profitable than they really were.

Finally, awarding executives with bonuses and incentives necessitates placement before the stockholders of non-binding “say on pay” resolutions, the idea being greater transparency for huge compensation decisions previously made behind closed doors in boardrooms.

The President’s proposal met with popular reaction among lawmakers. Even many Congressional Republicans feel the ways chosen by some financial institutions to spend their TARP bailout money so far borders “close to being criminal,” in the words of Senator Richard Shelby of Alabama, the top GOP member of the Banking Committee.

The mood on Wall Street was very different. Bankers and market analysts not only bewailed government intrusion but also argued the restrictions would hinder rather than aid economic recovery.

“That is pretty draconian – $500,000 is not a lot of money, particularly if there is no bonus,” huffed James Reda, founder and managing director of James F. Reda & Associates.

“If I didn’t pay [bonuses], the people were going to go . . . These people didn’t choose to cure cancer. These people didn’t choose to do public service work . . . These people chose to make money,” argued Jack Welch, former CEO of General Electric.

“The consequences of it is going to be a massive brain drain of senior talent from those companies that have taken TARP money to those companies that have not,” lamented Donald Straszheim, managing principal at Straszheim Global Advisor.

“Companies that need the most talented people to fix their problems won’t be able to pay them,” agreed Jamie Dimon, CEO of JPMorgan Chase & Company,

Pearl Meyer, senior managing director at Steven Hall & Partners, told Fortune magazine this is already happening. “Right now AIG is hemorrhaging people and they are being grabbed up right and left.”

It seems extraordinary to me that banks would be so eager to take on senior managers who helped drive their old companies into the ground. Yet even if this mindset prevails, it is notable the food chain will be filled from the other end, such that executives at financially troubled banks who refuse to work for reduced pay and bonuses have a long line of eager replacements, much like the situation at my company.

Why would conservatives object to this? They are the ones, after all, who believe Darwinian competition within the free market is the answer to every problem from globalism to substandard public education. Apparently, they do not like the concept so much when it reaches into their own executive suites.

Lauren Smith of Keefe, Bruyette & Woods, as well as other analysts, predict a talent flight from the big firms to smaller investment banks. That sounds like it could help strengthen the financial services industry across the board and help temper the excesses that result from oligopolies of a few giant companies.

Many pundits are suggesting that now is the perfect psychological moment to punish Wall Street’s elite. The fantasizing of Los Angeles Times columnist Pat Morrison sums up this mood nicely.

“Oh, I want it. I want it bad . . . when Barney Frank starts hauling fat-cat CEOs before his committee, I want him wearing a barbecue apron. Instead of a gavel, I want him wielding a barbecue fork the size of a trident . . . I want groveling. I want show-trial sweating and stammering. I want their nine-figure bonus checks endorsed over to the rest of us. I want my 401K money back. I want blood.”

Granted, the reality is a bit more complicated than simple vengeance.

Timothy Egan makes a better analogy in the Washington Post with Major League Baseball stars. While we all find their multi-million dollar salaries preposterous, most of us just shrug so long as they keep slugging home runs and making brilliant fielding plays. Only when their performance fails to meet expectations do we truly begin to pillory them for still receiving such exalted sums.

Likewise, most of us grew disgusted by stories of highly compensated executives during the 1990s and beyond but we accepted it so long as our retirement accounts and own small investments continued to grow. When the economic downturn began, we began to object, much like baseball, at disconnects between the “superstars” and the rest of us.

We lost raises and bonuses, and sometimes our jobs and houses, because of their greedy and/or bad decisions. They walked away with huge exit packages, only to have a different company hire them into a similar position at another outrageous salary.

Obama objected more to this inequity than the mistakes made by Wall Street and others when he announced the new limitations.

“This is America. We don't disparage wealth. We don't begrudge anybody for achieving success. But what gets people upset – and rightfully so – are executives being rewarded for failure. Especially when those rewards are subsidized by U.S. taxpayers.”

Treasury Secretary Geithner was somewhat more direct.

“There is a deep sense across the country that those who were not . . . responsible for this crisis are bearing a greater burden than those who were.”

House Financial Services Committee Chairperson Barney Frank was predictably even blunter.

“People really hate you,” he told a group of bankers the other day. “And they’re starting to hate us because we hang out with you. You have to help us deal with that. You have to avoid being stupid.”

Once again, big business wants it both ways. They want assistance but at no cost to them. They want to keep enjoying the same immediate, overwhelming, non-ending gratification that helped get us all into the current mess where we currently find ourselves.

By taking TARP and other federal money, that makes me – as a taxpayer – kind of their boss for a change. I do not want revenge and I do not want to punish anybody. However, just once, I would like a chance to tell the kind of people like the people for whom I work what they kept telling me as they followed other rules for themselves.

To wit, just as bonuses and salaries were good in good times, so it is appropriate for some shared sacrifice in bad times.

C’mon, folks, the needs of the business dictate. Either pack up you bags and leave in search of greener pastures, with no golden parachutes to hold you up, or shut up, suck it in, and take one on the chin.

Oh, yeah . . . and stop being stupid.

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