Arnold Kling  

The Bonus Issue

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Selfish Reason to Have More... SuperFreakonomics, II...

I was against the bailouts from day one, and I have not changed that position. Government spent my money without my permission on bailing out AIG, Goldman, and the rest. I won't repeat my references to Henry Paulson as a thug, since that term gives offense. Let's just say that for whatever reason, the government decided that those companies should not fail.

At this point, why should I care about bonuses to employees of those companies? If the money is taken out of their bonuses, where does it go? Into profits, I suppose. That's between the shareholders and the employees. Maybe lower bonuses help shareholders by giving them more near-term profits. Maybe lower bonuses hurt shareholders by driving away good employees. Either way, as a taxpayer, I don't see why I care.

As a taxpayer, I know that I am helping to pay the salary of the "compensation czar" and his staff. I help pay for the cost of hearings were Congresspersons berate the bonuses. Other than that, I do not see what I get out of the whole bonus brouhaha.


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COMMENTS (14 to date)
ed writes:

Don't taxpayers have a stake in these firms, via the Treasury and Fed? At a minimum we are creditors, and we often have an equity position as well, especially in AIG.

(That said, I'm not convinced this move is in the shareholders interests.)

kingstu writes:

Another example of a politician paying us back with our own money.

Randy writes:

"I do not see what I get out of the whole bonus brouhaha."

Agreed. Paying rent to the government no more gives me an interest in the government's business than paying rent for an apartment gives me an interest in the landlord's business. I mean, its not like if the government should somehow turn a profit from the whole affair that I would ever see a dime of it.

Daniel Kuehn writes:

RE: "At this point, why should I care about bonuses to employees of those companies?... That's between the shareholders and the employees."

Are you serious about this post or are you just pulling our leg?

You do realize you're a shareholder, don't you Arnold?

Troy Camplin writes:

Worse, I actually heard Wolf Blitzer say that the depression was caused by high CEO salaries. Seriously. With that kind of gross ignorance being perpetuated, and no doubt many believing it, I don't have a lot of hope. We can't allow that kind of economic ignorance to continue, or else we're going to continue having these problems.

Doc Merlin writes:

Companies were coerced under threats to take the money, and are now being penalized for it.

That should be reason enough.

Randy writes:

Daniel,

"You do realize you're a shareholder, don't you..?"

I may have a "share", but only in the propaganda sense. It certainly isn't an equity share. Only the political class has equity shares. For the productive class, the costs of government very greatly exceed the benefits.

N. writes:

You are paying the czar's salary to watch the rich suffer. Don't you want to see those overpaid fatcats suffer?

Personally, I think this falls under 'circuses.'

Simon K writes:

Since most of the bailouts ended up with the government holding substantial quantities of equity, or at least preferred shares, in the bailed out firms, we should all care. In some cases its quite possible the treasury will end up making money of the deal, which seems preferable to me as a taxpayer, since if they make a loss the money will come out of my taxes in the end.

Seems to me this will in fact be an interesting test of the claim that executives in big companies deserve their extravagant compensation. If the treasury makes money in spite of the pay restrictions, it indicates that the supply of top big-firm executives is less price-elastic than they'd like to pretend, and their compensation has more to do with ineffectual shareholders and fiddled compensation comittees.

Freedom Thinker writes:

Simon K.

RE: "In some cases its quite possible the treasury will end up making money of the deal, which seems preferable to me as a taxpayer, since if they make a loss the money will come out of my taxes in the end."

It's ALREADY come out of your taxes or through printed money. It's already spent. If they lose money on these investments it's money already spent. Take for example GM it's market cap was so small that the government would have to get a 19,000+% return on their investment to break even. Guess what they're going to lose money. But their is no more risk for that because it's already spent.

Perhaps what you meant was if the government makes money on the deal it'll be given back to you. But it's not like they're going to cut you a dividend check. They'll just spend it on something else. When was the last time the US government decreased its spending substantially? They've tied up billions and created investment portofolio's of to big to fail companies that if lose money oh well and if make money are little cash cows for government spending and waste. Social Security and Medicare ran surpluses for years what did the government do with that money? Spent it.

Arnold's right no need to care here. They only thing I care about is making sure taxpayer dollars aren't wasted in the future, ha ha ha, like that's possible.

caveat bettor writes:

A purist might say that Arnold is a shareholder if he can vote his shares.

So in this case, he's not.

Caitlyn Nesbitt writes:

Bailouts are ridiculous. I agree completley with you in not caring one bit about whether these big companies fail or not. This world is about survival of the fittest and if they can't cut it then they should just slowly die off. We as Americans can always replace big companies but spending my money on someone else's bonus that I'm sure they do not truly need is just wrong and stupid. There has to be another way then taking the tax payers money without their permisssion.

Brittany writes:

I don’t know if I would go as far as saying that bailouts are ridiculous because they do have an important economic purpose. They seem pointless because of the way that the money is spent within the companies, therefore ruining the goal of the bailout. Keeping these large companies alive does help the economy by not making all of their workers unemployed, but I think that using the government money more wisely would affect a greater span of people in the population. Obviously the greedy guys in power give use the money for raises and bonuses for themselves and have no intention of using it for the greater good. I think more government involvement is required to make a change in this situation. The government should make sure the money is spent in the correct places within the company so that profit and sales are increased therefore stimulating the economy (what the bailout was supposed to do in the first place). If they use the money to become more efficient, produce more goods, and to get the consumer to buy more, then the bailout will do its job and it would help us get out of the recession.

CJ Smith writes:

Caveat Bettor, your comment is valid if you are looking for a straight shareholder-company relationship. The government bailout is more analogous to a mutual or pension fund - company relationship. The government acts in the role of the mutual company or pension fund, and the taxpayer acts as a participant in the fund. You don't get to vote directly on the company's issues, but you do get to vote on how the fund is managed and/or choose to leave the fund.

Dr. Kling, I have difficulty understanding your "do not care" position on this matter.

First, the government bailouts were not pure grants to the financial organizations - they were combinations of debt and equity. Thus, a reduction in excutive compensation has two possible beneficial effects to taxpayers (via the government). First, reduced costs free cash that can be used to retire - repay government debt, thus addressing your initial objections to the program. Second, as many here have pointed out, when the government has taken an equity position, reduced costs lead to additional net income and cash that provide return on investment to the government, which can turn a "government bailout" into a financial benefit - consider the government bailout of credit unions thorugh the Resolution Trust Corporation.

Additionally, to make a normative value judgment, is it "fair" for executives to take bonuses and additional compensation rather than pay off debt or increase shareholder return? Assume for the sake of argument that the bonuses are related to improved performance of their companies. Is the "sucess" of these executives really related to their efforts, or the fact that the government propped their company up through a massive financial reset; anything other than the avoided bankruptcy is an improvement; and the "rising tide lifts all ships" effect.

For those who try to play the "we have to pay top dollar, or lose talent to competitors" card, please provide three or more examples of a CEO or other high-level executive of a Fortune 500 company who actually quit over a pay decrease or insufficient additional compensation and then went on to take another Fortune 500 market competitor to greater profitability, market share, or competitiveness.

I'm reminded of the CFO applying for a job with an M&A firm. He asserted he was eminently qualified for the position, because he'd bankrupted 3 companies in the last 5 years...

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