Monday, March 23, 2009

First bank and financial institutions, then manufacturing and eventually everyone?

A reader left a comment on my last post, "Mob Rule in Congress" supporting something being done with the bonus paid to top talent at AIG. While I agree that this problem exacerbates the social problem of increasing inequality, the idea that Congress should do something unconsitutitonal (in reponse to anger and not the issue my reader raises, growing inequality) I still disagree (strongly) with. why? because will you ever see an angry populace demanding a pay increase for anyone? No. Anytime financial compensation gets into the public view, the resopnse is negative. Whether it be for CEOs, or for teachers, or for police, for legislators, anyone....the public gets miffed about it. I think it has to do with the growing inequality, but the answer is not to pass legislation one "high-paying" job at a time to curb the problem.

The angry mob should be largely ignored...I doubt it will carrry over to the next election.

the growing inequality should be dealt with by a more progressive tax structure (though I detest the idea of increasing taxes on work....let those who performed for their bonus have it, but those who just reap the dividends of others' gains, should be taxed at least as much as work).

Pass legislation making unions more relevant, easier to form, collectively bargain all state jobs...though a good argument can be made not too, but I'd still support it.

Get the nurses, accountants, police, firefighters, teachers, dental hygienists, SECRETARIES, all unionized, and that would help narrow the income inequality gap very quickly. And it would not be under goverment action.

But, apparently President Obama is not reading my blog. Because he is going to try to legislate compensation. One could argue that since the government owns so much of these banks, that they are the new boss, but it looks like more than that: Here is the full article. Here is the excerpt:

One proposal could impose greater requirements on company boards to tie
executive compensation more closely to corporate performance and to take other
steps to ensure that compensation was aligned with the financial interest of the
And why only tie executives? why not junior exectuvies, secretaries? Why not me, a college professor to how many student credit hours I generate? Doctors are billable hours folks, why not me, or anyone? Nope, I don't agree with this, it is not for the defensible reasons (decreasing social inequality), it is for purely political reasons and of the worst kind--anger. this is not leadership. This is little different than what George Bush did with the Iraq war.


Barbara said...

Okay, good points. I didn't really say that executive compensation should be controlled by Congress per se, but the market has not done a good job of controlling bonuses and golden parachutes and all the other stuff that has gone on which basically separates the pay from the performance. Regulation is probably better than legislation, and regulation should control public companies that trade on the stock market. You could argue that a state university is also accountable to taxpayers and therefore employees should be paid for performance. This is easier for some jobs than others; for faculty, performance is a more nebulous concept. Pay should be based on performance in publicly traded companies. The market has not been able to do this. The companies will not do it. The only one left is government, who has to protect their citizens from this abuse. We need to put controls in place that used to be there before deregulation.

Tom Steiger said...

Thanks again for commenting, Barbara, I think you and the googlebot are my most loyal readers.

I would argue that the market is controlling the compensation of these folks. The market is whatever someone is willing to pay. And AIG obviously was worried that these valued employees would go elsewhere. Why else do the companies move to employment contracts instead of at will employees. Companies are generally going to do what is in their best interest, at least as far as they can see it.

Only external constraints on the market will stop this practice, but external constraint don't have to be legislation. they could be shareholders, boards of trustees, or just the bad press.

Corporations hate controversy, the press is doing a fine job here, Congress is just making a fool of itself.

Regardless of the compensation scheme or regime, it all comes down to the effort bargain. How much effort for what payment? It is a struggle between the employer and employee. It is structural. Few employees are willing to just share in the profits...they'd prefer to be a cost, not a shareer in profits. Nonprofit organizations like universities have diffderent budget constraints. Administrators tend to view faculty time as totally elastic (and frankly, so do the faculty). And, faculty probably prefer to be paid based on status, and not on performance, as very few faculty step up and embrace such schemes.

I kind of like the billable hours folks. I'd like to be able to bill the school for my additional tings, with a base salary for x hours of teaching. Faculty senate? 5 hours a week, here is a bill for$500 a week. Serve on a personnel committee? here is a bill for x dollars a hour.

Research should be its own reward. Or perhaps a ritual to get tenure, which is its own reward.

heretic. Yup, I'm a heretic.

Barbara said...

I'm an outcomes-based person myself. I would like to be paid on what I produce. If I can create something that is valued by someone else, then they pay me for what it is worth. This is based on my ability to be competitive with others providing the same outcome. The problem is that outcomes have become so far removed from value and worth--when you pay for an investor to invest your money, you don't know what kind of return you will get because the market is fickle. It is like gambling. The only guaranteed return is on bonds, not stocks. Value thus becomes based on trust, not results. You trust that when you give a retention contract to someone, that they will be worth it. What if they aren't? Is the contract still valid if someone doesn't produce the contracted outcome? These retention contracts should be invalidated because they were predicated on the employee producing the expected outcomes. You could argue that the employee did not have influence over the outcome; then why give them a contract based on their ability to produce it? The way I understand it, retention contracts were given to the very brokers/investment managers who made the bad loans in the first place. AIG is an insurance company, not a brokerage firm, so I don't really understand the vagaries of finance that would make these employees who received these bonuses responsible in some way for the meltdown. But if they in any way were responsible for this, why in the world should they get a bonus??
I'm all for worker protection, but when an employee engages in risky business to get a higher than normal return and then is caught in the risky web, does that worker deserve the protection of a retention contract? Should an organization who trusted the worker to deliver on his/her promise of value creation have to honor that contract, even if they would have gone bankrupt without a government bailout? I say no. Let these valued employees go elsewhere and ruin another company. And if they had no responsiblity? Why did they have the retention contracts at all if they had no impact on the bottom line?
Organizations are made up of people. Some produce the value of product or service, and some manage that production. Everyone can make a mistake. Seems to me that someone at AIG made a big mistake offering these contracts in the first place, and then a second mistake was made in paying bonuses mandated by these contracts when the company was technically bankrupt and being kept afloat by government money. The bonuses should not have been paid if the performance was not there.

Tom Steiger said...

The fact is the system is now so complex that I'm not sure anyone understands it. But, sometime in the early 90s, regulations were changed to permit financial institutions to do more than just their narrowly regulated insurance companies could become investment companies, could become banks, could become brokerages and so on.

As information about those bonuses has trickled out, none of the bonuses were for people who were responsible for the debacle, rather they were for people who were going to dismantle that portion of the company.

I don't pretend to understand this stuff. And these derivative securities sound like a lot of mumbo jumbo to me. I read reasonable descriptions of them, the last one was by Paul Krugman...sounds almost like money laundering to me.

I realize I am changing the subject here a bit, but I think I am in agreement with Krugman, the Obama Administration is wrong to try to free up the securitization markets. Krugman makes a good point, so far, the Obama Administration has gotten some economic activity going by bribing people to enter the market. Including the mortgage markets. They are "artificially" low right now. Isn't that, in part, what caused the problem in the first place?

I don't think evaluating performance is that difficult at all. One either produces something or is overhead. Faculty produce several things: principally they produce instruction or they produce knowledge in the form of research. Faculty are incredibly privileged employees. It goes with the former territory when the students were mostly the sons (and a few daughters) of the upper class. Our pay could be based on the number of students we instruct, a rigorous 3-data point evaluation of instruction, and the number of publications we produce. Teaching would be about 75% of our salary, and we could opt to teach less for more research time, but that pay is based on the articles.

Would I like that? No. But it makes more sense from a systemic perspective that what we have right now.

That other stuff we do, serving on committees and all that is overhead. Recognize what it costs and pay people to do it, based on a straight ocntract...serving on the faculty senate is X hours a month, so you get $60 an hour to do so.

This would eliminate the ridiculous notion that faculty time is totally elastic, and individual faculty could see how the institution values specific activities.

Barbara said...

Yes, I agree with much of what you have said, except that there are cases where performance is more difficult to ascertain, particularly with knowledge workers. Often the manager does not know exactly what the employee is doing, and therefore depends on time in the office to decide if work is being done. The assumption that if one is in the office, they are working, is simply not true anymore. I can be surfing the internet instead of working. The same is true if I am at home--I can be working even if I am not at work. So the tough part for a company who wants to pay for performance is figuring out what the performance is, and what outcomes they want to pay for.
I think that it is difficult to pay for performance for faculty. Let's look at instruction--if a faculty member gets high approval ratings from students, does that mean that they are a good teacher or a popular one? In some departments it is easy to figure out the "good" publications; in others, the disciplines can be so specific and the journals so numerous that the P&T committee may not even know which are the good journals for one faculty member's specific discipline. So do we pay on quantity or quality, and if quality, often the one making the judgment just doesn't know. I agree on the committee/service idea also, but again, just because you are on a committee didn't mean you did squat. In order to pay you for your service, we need to introduce a way of figuring out what your contribution was, which adds more time requirements on the committee members who don't have enough time. The simplest pay for performance is a sales person on commission; another example is someone who would get a "cut" of every dollar they save by reducing operating costs. It gets more difficult from there.

Tom Steiger said...


Thanks again for posting. I think the googlebot has even forsaken me, but you remain loyal!

In a perfect (and maybe not so perfect) world, evaluation would not be needed. We evaluate not so much to reward, but to enforce. We believe, and perhaps it is true, that if we don't supervise, that employees will slack off. I think that is true, after all, in most cases we are not working for ourselves but for someone else. Having said that, then there is administrative overhead in the evaluation system, any system.

No system is perfect. A good one is reliable and valid. Reliable means, I'm sure you know, that repeated examinations or different people looking at the record would come to the same conclusion. Valid, really means fair, and that requires both the evaluator and evaluated to agree.

Many claim that teaching cannot be fully evaluated. I agree if the real evaluation is to just look at student satisfaction scores measured with a single item response. On the student evaluation forms we use at my university, rarely do I ever see anyone, from the professor to personnell bodies ever look at anything but that single question. Now, one could argue, just as easily, that "excellence" is reflected in several measures, together: students are satisfied, students report they learned more in this class than in others, and worked harder in this class than others. So, while the prof might be popular, the popular prof still has to work the students hard and they have to indicate they learned. That is a tough thing to do. Myself, my students work, they learn, but they don't care as much for me. Okay, I'm not excellent by my own measure, but either is the wildly popular prof whose students indicate they don't work hard or learn much.

For faculty, I'm a big fan of 3 year plans. A faculty member establishes professional goals which are agreed upon by the faculty and chair. The faculty member is evaluated based on their own plan. For pre tenure faculty that should be every year. The understanding of the journal one publishes is, is established a priori, not after the publication has occured. A change in the publicaiton outlet, has to be explained and understood.

yes, what i describe creates more administrative overhead, but what it should be called is continous develepmont, something my university does NOTHING about. Instead, faculty at my university operate in a blind beauty contest, not even really knowing what the criteria are nor the judges.

I agree, there are things that cannot be easily measured, but we can measure things that a perhaps related. Surfing the net at work and working on the net at home? If one's work is project oriented, then how one gets the project done matters litte. At the same time, I worked as a computer consultant once, and every day, our manager dumped our "dayfiles" which recorded every keystroke on our computers. Not only could we not surf the net (this was before the net, but we did have games) but all our errors, including our poor typing were used as a measure of performance. I don't advocate such a system, but the dayfile was an objective document to which one could argue with the manager over performance, rather than just the manager's impression.

I favor objective measures. Objective measures make it much harder to discriminate against individuals. Few supervisors are self-aware enough to realize how their feelings about people, groups, etc, color their impressions. There are so many people who I don't really like very mcuh with whom I work but whose performance and talent I admire and respect. At the same time, there are people who I like a lot who are very poor performers. And I have rated them poorly in evalutation reviews. But, I know I am atypical. Most favor their "friends" and work against their enemeies and are clueless about their biases, even when they want to be "fair."

Fairness alone demands we work at developing reliable and valid evaluation systems.

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