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The “Flight of Talent” Argument Really Cracks Me Up
By JLP | February 5, 2009
The Obama administration has placed limits on executive pay.
The opposition’s argument is that such limits will cause a flight of talent away from these firms, which brings up an interesting thought:
Imagine how bad things could have gotten if we would’ve had less talented executives running things!
I can’t say that I’m in favor of mandating limits on pay. I do think bonuses are out of line in this economy—especially at these firms that lost tons of money through dumb mistakes. When a company loses money, you don’t pay bonuses. That should be pretty simple to understand. But, I also don’t like the government placing limits either. It seems like an emotional decision.
That said, the opposition’s flight of talent argument really cracks me up. Do they know how stupid they sound?
Topics: Business News | 33 Comments »
February 5th, 2009 at 9:18 am
I’m against the government mandating anything about private companies. If they want to give their CEOs exorbitant bonuses, then they are running the risk of their business failing through bad financial planning. The only reason we start talking about this is because the government is bailing them OUT of their financial mess. If we just let the market take care of it – if they continue poor financial planning, eventually they will go out of business.
(It’s funny how evolutionary “survival of the fittest” types do NOT believe that when it comes to the marketplace.)
But I get the point you are making about the flight of talent. If these were the “talented” guys, I’d hate to see what the other people do!
February 5th, 2009 at 10:14 am
Lindsay,
I want to clarify that the limits are only being placed on those companies that accepted the bailout help.
February 5th, 2009 at 10:15 am
I’m just curious where this “talent” is going to go? Is any other company going to pay them millions of dollars to run thier company in the ground?
February 5th, 2009 at 10:19 am
OMIGOD! I was just taking my morning stroll through my favorite blogs and got to this post. Too funny and too true. Now, JLP, do you have some frugal hints about getting spilled coffee out of a keyboard?
February 5th, 2009 at 10:22 am
Daniel,
That’s a very good point that I forget to mention!
Grace,
Sorry…buy a new keyboard. I ruined a computer with coffee once. I hope yours wasn’t a laptop.
February 5th, 2009 at 10:28 am
I don’t like the idea of mandated executive bonus caps — unless the companies are accepting bailout money. If the companies are going to socialize the risks of their poor decisions and cost us money, there should be a cap — and not the generous (IMO) $500,000 cap being floated. It should be lower.
If a company wants to try and make it in the marketplace by rewarding stupid decisions, let it pay exorbitant bonuses.
February 5th, 2009 at 10:36 am
When is Obama going to create limits on congress and president pay?
February 5th, 2009 at 10:38 am
I also find the flight of talent arfument ridiculous, especially considering how many in the business do not have jobs. It’s not like most of these people will get a better offer somewhere else.
Executive pay has definitely gotten out of control. I support the cap on exec pay because they’re using tax payer money to keep them alive, and therefore we should be able to have restrictions as a requisite for taking publix money. If they don’t want the government to get involved, then don’t ask for money.
February 5th, 2009 at 10:42 am
They already set the bottom with minimum wage, why not set the top?
February 5th, 2009 at 10:55 am
@JLP:
“That said, the opposition’s flight of talent argument really cracks me up. Do they know how stupid they sound?”
why is that stance stupid? Do you honestly think a top CEO would choose to work for a bailout-company for 500k/yr (+50million in stock options that can only be executed AFTER the bailout $$$ is repaid) when they can work for company XYZ and get 20million guaranteed (+30million in stock options with hardly any exercise restrictions)?
I don’t usually disagree with you, but wtf?
I understand the dilemma…the company is running on tax-payer dollars, so you want to make sure that money isn’t squandered on CEO compensation. However, on the flip side, don’t you want this tax-payer funded company to have the best possible management?
obviously the only true fix is to have never bailed out the companies in the first place, but that ship has sailed.
February 5th, 2009 at 11:06 am
Ted,
I’m not saying I agree with the mandate. I’m a free market guy. But, when you have companies like these, failing like they did, one has to wonder how important talent really is…
Besides, this is a temporary thing. I do think $500,000 per year is kind of low for a CEO running a company based out of New York. But, the potential for a bigger payday is there if they run things right.
My main problem is with the bonuses. A bonus should be just that…a BONUS for going above and beyond. If the company loses money, they have failed and no bonuses should be paid. I don’t care if that’s part of the pay package or not.
February 5th, 2009 at 11:32 am
Your opinion forgets that the “limited talent” argument includes foreign executives. Salary caps placed by the government is a socialist policy, and if people feel the government is placing a safety net and a glass ceiling, they will be less motivated and turn complacent.
February 5th, 2009 at 11:56 am
I guess if these CEOs want to avoid the salary cap, then they can fix the mess they created and give back the money they took from the gov’t. It looks to me like this is a shrewd move by Obama to try and limit the duration of the bailout. The sooner you fix your mess, the sooner you get your salary back. Then again, I may be giving him too much credit.
Anyway, I was going to say something about the inflated egos of some of these folks and then link it to them being New Yorkers and Ivy League grads, but that is unfair populist stereotyping by someone living in flyoverland, so I won’t.
February 5th, 2009 at 12:45 pm
@JLP
>> “But, when you have companies like these, failing like they did, one has to wonder how important talent really is…”
This ^^^ is not an argument for a salary cap. This is an argument for NOT approving the bailout.
Nevertheless, the guys who ran these companies to the ground have obviously already proven they are not the best fit for the job and need to be replaced ASAP. But who are you going to replace them with for $500k/yr?
Chasing bad decisions with more bad decisions is a losing strategy. You and me, we both now have a vested interest in these companies turning the corner and getting back into the black. Don’t you want to give them every opportunity to do so?
>> “Besides, this is a temporary thing.”
And you call yourself a free market guy…ouch.
“Nothing is so permanent as a temporary government program.” – Milton Friedman
@Sam
“It looks to me like this is a shrewd move by Obama to try and limit the duration of the bailout.”
It looks to me like this is a populist pandering unintelligent move by Obama.
February 5th, 2009 at 12:52 pm
Ted,
Like I said, I’m not really a fan of the wage cap. My point of this post was to poke fun of the argument of “flight of talent.”
I think we would have been better served to put some incentives in the mix. Ownership rather than income.
This is why I was against the bailout to begin with. Once you start mixing public funds with private funds, it gets thorny.
February 5th, 2009 at 1:30 pm
# Curt Says:
February 5th, 2009 at 10:36 am
When is Obama going to create limits on congress and president pay?
There already are limits. The trouble is, Congress creates them and often raises it by vote. Usually everyone votes yes (obviously).
February 5th, 2009 at 1:33 pm
I don’t think non-talented people would have made the issue any bigger. What was need was people that weren’t greedy.
I think the cap for executives is fine if they are receiving goverment funds. The goverment should not however put any laws in place for the private sector. I think that we will soon see major changes to how exectives get paid in the future.
February 5th, 2009 at 2:17 pm
I think you have a point, JLP. But the point, and the bailout in general, seems misguided. The salary caps (and corporate jets, and corporate retreats, and all the other frivolous spending these companies engage in) is but a drop in the bucket relative to the amounts of money involved in the bailout and the economic problem affecting us. Those expenses are a small percentage of those companies’ overall expenses.
While I don’t care about what the companies do with their money, I do not think they should be entitled to receive any tax money. I think the money should be spend by giving it to those who have *not* squandered the enterprise or assets entrusted to them. From financial companies to mortgage owning individuals. Take their average net profit in the past year, and divvy up the bailout among them proportionally. Maybe even give the smaller entities and individuals a bit more in proportion. The extra liquidity will boost the economy in what is likely to be the most responsible way, given the recent financial performance of these individuals and entities.
February 5th, 2009 at 2:25 pm
@JLP:
>> “My point of this post was to poke fun of the argument of “flight of talent.””
please elaborate on why you think talent will not take flight from these salary-capped positions?
February 5th, 2009 at 2:52 pm
The general public doesn’t understand how that industry works. Flat salaries are not that much relative to their bonuses (they also don’t get paid overtime like the majority of peopl do). Bonuses are paid based on some baseline of generating profits through trades or whatever their specific job is.
People in that industry don’t go there to be a civil servant. They chose to take that job and the stress/hours that comes with for a reason. If you take away that carrot of more money, majority will simply leave for a hedge fund, foreign company, or some other business adventure where they can make the money. Those funds or companies will then be the ones that profit from this mess once it starts to recover.
It would be a shame to have the taxpayer at risk and then they aren’t able to profit from the recovery.
Sorry for those who hate that but that is how the system is set up. Some country will always allow people to make as much money as they can and those will be the ones that drive the rest of the world. Until now, that has been the United States of America – unfair or not.
February 5th, 2009 at 2:54 pm
Ted,
That’s the whole point…these problems were created WITH supposedly talented people.
February 5th, 2009 at 3:04 pm
Ugh.
Board Members set executive pay. Let the free market prevail. Keep the private sector private.
The gov’t should have never used taxpayer money to bail these companies out. Now we are just a few short steps away from being socialist. Yippee.
February 5th, 2009 at 3:44 pm
Don’t care for this piece of legislation at all. Keep the private sector just that – private!
February 5th, 2009 at 4:02 pm
Long time readers of this blog already know that I was not in favor of any sort of bailout. I think bailouts are a dumb idea and are only going to do more harm than good.
This post was not meant to show my support of salary-caps.
February 5th, 2009 at 4:07 pm
@JLP:
>> “That’s the whole point…these problems were created WITH supposedly talented people.”
So out of the entire set of so-called “talented” CEOs, there exists a subset who failed at their jobs (for one reason or another). Therefore, the obvious solution is to deter the entire set of so-called “talented” CEOs from taking on these companies that are struggling.
Is that your point?
February 5th, 2009 at 4:10 pm
@JLP
>>”This post was not meant to show my support of salary-caps.”
maybe your sense of humor needs a bailout?
February 5th, 2009 at 4:41 pm
Ted said:
“maybe your sense of humor needs a bailout?”
That hurts, Ted…really hurts.
February 5th, 2009 at 6:46 pm
I think is further proof that a free market without effective government regulation and enforcement is dangerous and wrong
February 6th, 2009 at 7:25 am
JLP,
I surprised to see you go for the cheap shot sound bite. I can get that in the MSM. What I would hope for from you would be a more nuanced analysis of the situation.
The problems on WS are a combination of factors, which include economic policy mistakes (on a global scale), deregulation, lax enforcement of regs, poor risk management decisions on the part of WS management, and ultimately lack of long-term accountability both at the leadership level, as well as in some case at the employee level. Throw on top of that an explosion in new products and financial technology (i.e. derivatives) to amplify the effects of the above.
Wall Street is a mixed bag when it comes to talent. True, you have some dullards (usually the eye candy sales types who are good at sweet tolk and following orders) and these people are often simply carried by the tide, but for the most part, you really do have some extraordinarily talented folks. Many of them either don’t really need to work, or have enough put away to sit out this round for a few years, or have enough to go start their own business, or are extremely in demand at other firms that are not handicapped by the current crisis (and yes those do exist) or all of the above.
Additionally, there are many departments at WS firms that did make money the old fashioned way. They are the reason some of these firms didn’t lose even more money. Drive the talent away, and you might as well shut down the bailed out firms (which you might argue is what you would have preferred anyhow).
Lastly, some of the healthier firms were strong-armed into participating. Would you kill off those firms too? I guess our political establishment has done a pretty good job of redirecting attention and anger away from themselves and towards an easy populist target – those guys over there make too much money so they must be stealing it!
I just hope that in the process, we don’t throw the baby out with the bath water.
Rather than add fuel to the fire, how about some serious academic thinking about the source of our present state of affairs? And yes, if that sounded like a challenge – it was.
February 6th, 2009 at 7:36 am
The issue is there will be two kinds of financial companies: those with pay caps, and those without. Any talented workers at the capped companies will undoubtedly be able to do better elsewhere, so they’ll leave. Then the pay-capped companies will end up with bad executives AND no mid-level talent to speak truth to power.
February 9th, 2009 at 8:28 am
Ted,
Where are these talented CEO’s going to go? Are there really companies out there willing to hire a CEO from Countrywide or Bank of America? And if so I’d like to know now so I can make sure I don’t have money invested in them.
February 11th, 2009 at 1:54 pm
I think i remember and correct me if im wrong didnt the junk bond king i think in the 80s?? Didnt he get a job at UCLA teaching finance after his jail time?
February 11th, 2009 at 6:15 pm
Has anyone ever looked at the average pay for the CEO of a public company? A majority of companies pay 50-70% of total compensation in stock options, stock grants and other performance-based bonuses including cash. Only $1 million in salary is deductible by companies for non-performance-related pay. Therefore, many CEO’s are paid around a million for day-to-day walking around money and the rest is performance-based.
The problem here is two-fold:
1) Performance-based bonuses can include discretionary payments (regardless of meeting targets)approved by the compensation committee and board.
2) Shareholders are the one’s that lose because more options will be granted to make up for the up-front loss in pay.
Personally, I’d rather see the treasury department raise the level of non-performance-related salary deductibility to $2 million or more, increasing the front-end pay and decreasing the back-end pay. Then, if a CEO wants, he/she can buy stock on the open market, just like the rest of us.
The current structure is upside down in my opinion.