Pay Czar or Grim Reaper?
An article in this morning’s Washington Post points out that many top employees of financial firms being targeted for pay cuts by the government have already left or are on their way.
“There’s no question people have left because of uncertainty of our ability to pay,” said an executive at one of the affected firms. “It’s a highly competitive market out there.”
I understand that people are frustrated with the economy, but it is foolish to think that cutting the pay of people within the financial industry will turn out well. Compensation is a drop in the bucket compared to the host of other problems plaguing our economy.
This is going to backfire and the evidence above shows that it already is. If you are an executive in a multi-billion dollar financial firm chances are strong to very strong that 1) You are highly skilled and educated and know how to create value in an organization 2) You can find another high-paying job at the drop of a hat, or the ring of a phone.
The people working at firms that the Pay Czar is going after are already leaving and those who haven’t yet, soon will. As Alex Tabarrok of Marginal Revolution commented the other day (emphasis mine),
There is no way this will work as advertised. If the administration actually follows through, most of these executives will quit and get higher paying jobs elsewhere. Executives not directly affected by the pay cuts will also quit when they see their prospects for future salary gains have been cut. Chaos will be created at these firms as top people leave in droves. Will the administration then order people back to work?
Ayn Rand fans are chuckling right now asking themselves, “Who is John Galt?”
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3 comments
People who make six figure salaries are next. Watch how the definition of “rich” just keeps on shrinking!
Jack, I don’t think we need to get as granular as that – at least not in this discussion. Cameron highlights a great point, eliminating pay, and ostensibly the incentive to achieve, will be lost on top-level executives who will simply leave for another job that will pay.
At such a high level in business you can draw a direct analogy with athletes: the skill level of these folks (athletes and executives) is so off the charts that it will never take long to find someone who will give them money for services that few mortal men can render.
The government, as it always does, is merely exacerbating this problem.
Being an avid Atlas fan, the parallels are quite scary. Honestly, I don’t really think that people will leave in droves. The financial industry as whole may not be terrible adept at analyzing risk, but what they are good at is forging new ways of creating wealth. Not only working within constraints (government imposed or otherwise) but creating entirely new markets that must be regulated. Look back ten to twenty years at all the new investment vehicles that have been created. The inherent flaw in government regulation is that it is entirely reactionary. By the time the pay legislation is enacted the industry will already have a dozen new ways to be compensated.
My real fear is the precedent that is set by this action. The slippery slope if you will. What is next after the financial industry? Our nation already has one of the most complicated legal and tax structures in the world. Is there any wonder why jobs are shifting to overseas markets? Will this help jobs return? Will this incentivize innovation to create new jobs, markets, industries? I doubt it. I am putting up a post today on getting past the debate on what is right (which can be defined infinitely by the broad spectrum of people out there) and getting onto what works realistically now. Ironically this is one of those issues where many would argue that what is right is what works. Use competition to reward the most worthy individual. I would that it is the government’s interventionist policies that enable incompetent financial executives to earn outrageous salaries when their company is failing. Compare the CEO of Lehman to one of his bailed out buddies. Both failed but the bailed out CEO’s are the ones who are in the headlines now because they are earning too much.
We will see where this goes. Hopefully Atlas Shrugged isn’t too prophetic.
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