June 19, 2009 — Two items from the June issue of Money magazine that caught my attention, and might catch yours as well.
The first was an interview with Cornell University Economist Robert H. Frank that touched on the subject of executive compensation. Sounding like a true economist, Professor Frank said, "The jobs that are the most important and create the most value end up paying more. You need [salary] bidding wars to help people identify the best people and steer them to the right places." Then he adds, "What's not true is that they need big salaries to be willing to work hard. There's no evidence for that."
Frank has hit on a very common fallacy here. I personally have spoken to reporters (and some family members, too) on the subject of executive compensation over the years and they tend to routinely say things like: "well, why do these guys need so much money anyway?" Or "how many yachts can one water ski behind at once anyway?" But the bottom line is that they don't need big salaries to work hard; the money is a sorting mechanism. Frank said it well.
Interestingly, Professor Frank also believes there are similarities between the steroid problems in pro sports and what caused the financial mess in the U.S. The potential upside of the risky behavior is not equal to the potential downside. Plus, if you get caught, there is always safety in numbers — the good ol' excuse of "well, everybody else was doing the same thing" actually gives people a way to rationalize it.
Money also noted, in a column called "Three Ways You'll Know the Economy is on the Mend," that the American Staffing Association's staffing index is a decent barometer of economic recovery. (www.americanstaffing.net, then click on staffing statistics). The ASAs index shows weekly changes in the number of temporary workers. The column notes that companies usually start bringing in temporary employees when the economy begins to recover, until they are sure the recovery is for real. However, for the record, the ASA index has been flat-lined since January — so recovery is not in sight yet.
E James Brennan, III Senior Associate Member Since: 4/19/1979 Comments: 406
It's the same old status game, with wealth as the scoring mechanism. The Bobby Bonds ratchet effect truly applies both to behaviors (moral hazard) and reward package escalation (where top execs hire testimonial consultants to act like business agents do for athletes). "Equity" is their war cry, but what they all mean is, "I want more, what HE got, or I'm insulted." (Yes, it's still a sexist top executive world.) Ironic, too, since higher pay in both fields frequently leads to dysfunctional performance. Heard Whitey Herzog gripe once that these multimillionnaire athletes refuse to risk injury by playing hard... same with the senior execs, I suspect, where fear of loss is more powerful than motivation to excel.
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