The 18-20 billion dollars in bonuses handed out by Wall Street firms has put outrage over management bonuses front and center with the public. The long history of mammoth bonuses has gone largely off radar since it began in the halcyon days of T. Boone Pickens, 30 years ago. Before that, sobriety and its stolid servant, propriety, limited the vulgarities indulged by American businessmen. We have become so accustomed to it over the years that, apparently, it has taken the involvement of tax payer dollars in the Bailout to really tweak the public and government officials now.
While it is in the public eye, it is perhaps a good time to examine that about which we are complaining. The practice has far reaching effects on the economy and on the performance of most if not all of the Fortune listed businesses. For perspective, the 18 billion in question among the Bailout companies is paltry compared to the 250 billion in executive compensation handed out year after year. That's 10% of the aggregate profits of American corporations. At issue is the core concept of the how personal wealth is achieved in the modern capitalist economy. Should it be taken when the opportunity arises, gratis, or should it be earned? Under what conditions is it OK for American business executives to ignore responsibilities to their country and its people in preference to share holders and themselves? Apparently it is OK simply because no one is asking.
Guiliani has had the recent audacity to claim that curtailment of large bonuses on Wall Street will damage the NY economy and reduce NY tax revenues. If you haven't heard that you might want to re-read it. Guiliani is entitled to his opinion, but he appears to be on the side of the argument opposite that of the public. The public's intuitive response is that executives who have obviously underperformed, in spades, do not deserve bonuses. But, also implied is that the dolling out of Bailout funds to executives somehow dilutes the impact and intent of the Bailout. Both are important perceptions. Both are accurate. Guiliani's point is a non-sequitur and simple smoke screen as the minuscule impact of unpaid taxes and unspent bonuses, and they are not intended to be spent, in no sense outweigh the good uses to which those funds could be put if they were still on the ledgers of the firms or in the hands of borrowers.
We are led to believe that these bonuses were paid out under contractual obligations. Those contractual terms having been met at some time or another in the last year then the money was contractually owed. Fine. Paulson, a Wall Street veteran, should have anticipated this and taken steps to prevent the use of public funds to satisfy private obligations where necessary. Bonuses are probably not the only abuses of public trust that will result or have resulted from private contractual obligations by these firms.
Note to Wall Street apologists: The public is not buying the idea that the bonuses in question were not paid out of Bailout monies. It does not matter out of which side of a glass of water you sip, in the final accounting the glass is less full.
Stepping back a little, it is easy to see that this culture of bonus me and I'll bonus you is somewhere near the center of what ails America. Perhaps it is a symptom and not causal, but still close to the core, a moral hazard. Short term personal gain seems to have supplanted any other consideration at the top levels of American business. None of country, long term business planning, technical or social progress, nor even fiscal responsibility have as much influence on the conduct of American business as does immediate personal gain of a company's principals. Even the lunatic Ayn Rand would be appalled at the conduct of Lincoln Savings, Enron or AIG.
The whole culture of bonus incentives has exacerbated the decline of American business leadership into a culture of peri-criminal opportunism. Stock award and option incentives have skewed business planning to maximize personal gain for certain, and whether that is always consistent with the interest of long term shareholders is highly debatable. Performance incentives have distorted strategic operating decisions to meet the terms of bonus awards and led to cost cutting as the primary model for increasing profits, to the detriment of company survival and many a job. Merger and acquisition payouts have motivated unsound consolidations that result in two out of three merged entities failing. Healthcare boards of directors have rewarded themselves and management for actually raising healthcare prices. Healthcare mergers have uniformly resulted in higher prices while the public has suffered consequences as extreme as death due to lacking affordability. Incentives, properly designed, can help a business achieve sound goals, but when the goals are to smash and grab the results are commensurate.
The argument for huge sums in compensation is and has been that a big paycheck will attract the best talent. It will attract talent alright, but the talent it attracts may not be the talent it was intended to attract. What is created with huge bonuses is a powerful disincentive to act with any consideration to any factors other than meeting the terms of the bonus award. What is the destruction of a few thousand American jobs compared to a whopping paycheck for oneself? It is a solemn test of perfectly calloused greed. Those who pass it are rewarded.
The public, and therefore government, has been indifferent to business excess in the culture of greed is good. We got here under the dulcet assurances of a miscreant philosophy that was invented to enable a culture of greed. We now reap the harvest sown by the delusions of Rand, Reagan and Greenspan.
Government is out of its depth on the issue unless and until the true nature of this culture of corruption is on the minds and lips of the public. On reflection, one must assume that the public was required to root out the Robber Barons of the turn of the 19th century. To turn away at this opportunity, when the corruption is at its most visible, will just reward the perpetrators. Government may not find it so easy to dictate business incentive practices. What they can do is reward the sound and productive business model through directing spending to entities that give incentives most consistent with the public interest.
Out of this and in due course will come more attention the question that has, to date, been asked by few. Is there an amount beyond which concentrations of personal wealth are destructive to nations and the public? The answer is yes, but how much that would be is yet to be determined and seems not to be politically answerable without the destruction of an economy. The answer is attainable with math, but who believes in that, it having been so rigorously discredited in anticipation of this question?