In 2006, Judge Sotomayor ruled that it was proper for the City of New Haven, Connecticut to throw out firefighter exams that were the criteria for promotion.  The reason?  There were no black firemen eligible for promotion based on the test results.  White and Hispanic firemen who passed the exam sued to reinstate the exam as the promotion criteria.

While I do not doubt that affirmative action has been and can continue to be an effective vehicle for justice, its rationale and implementation require constant monitoring.  At a time when the nation is re-examining and tempering the use of affirmative action, Judge Sotomayor favors expanding affirmative action in two extreme ways:

• (1) Judge Sotomayor favors hiring the lesser qualified applicant when lives depend directly on the knowledge and capability of the applicant.

Expert witness Vincent Lewis noted that the test included questions about proper use of fire equipment and that examiners should know that information.  Ricci v. DeStefano 554 F.Supp.2d 142, 149(2006). However, Judge Sotomayor prefers that skin color, rather than competency be the test in life or death situations like firefighting.  Her affirmative action ideology runs so deep that she favors risking property damage and deaths in the community in order to implement affirmative action. 

• (2) Judge Sotomayor believes in retro-active Affirmative Action

It is unconscionable that an organization hold out a test as the criteria for selection and then retract that test after the results are determined to be undesirable.  The facts of the Ricci show that the candidates invested significant time and money into preparing for the test.  In fact reasonable people would be justified in basing their career path on their chances of being promoted on the basis of their test score.  Destroying a person’s reasonable expectation does not comport with American values of fair play and substantial justice.  By contrast, traditional affirmative action in universities is known and expected before the investment is made.

The ideal solution for executive pay would be a self – regulating system that maintains a healthy tension between shareholder’s interest and an executive’s motivation for padding their own pockets.  The ideal model for this is the Solomonic pie cutting test solution:

(1)There is one piece of pie left and two kids who want it, (2) Mom says that one kid cuts the pie and the other kid picks the piece and (3) the kid slicing the pie is incentivized to cut the pie as fairly as possible.

Another intriguing model is the baseball arbitration model:

When baseball players are arbitration eligible, (1) the player and the team each submit a salary figure to an arbitrator (2) the arbitrator picks either the player’s number or the team’s number.  The player is therefore motivated to submit a reasonable number to the arbitrator in hopes that the arbitrator sides with him.

The pie cutting model is more elegant because it doesn’t require an independent third party.   Ideally, the model would not cap executive pay, but simply put the executive’s pay clearly between his own desires and shareholder’s interest.  And when I say clearly, I mean that there is no buffer (like a board of directors) between the two interests.

SOLUTION:

Each publicly traded company should have a $5M or 1% earnings cap, whichever is greater, on the base salary and benefit package that any employee would receive.  However, in addition to the cap on base pay, each executive would also get a bonus.  The executive would submit a bonus figure to the stockholders and they would vote on whether to give it to him or not.  If they vote YES, he gets the requested bonus, if they vote NO, he gets no bonus.

This puts pressure on the executive to request a reasonable bonus based on his actual performance from the previous year.  This would eliminate the AIG bonus situation because the executives would not have the courage to even ask for a bonus when they ran the company into the ground.  This solution would eliminate executives who get overpaid when their company takes a loss.

However, this solution may not incentivize executives to meet long-term shareholder goals.  As an option though, the bonus that the executives would receive, could also come in the form of 3 or 5 year vesting stock options.

Ideally, the solution would involve no government intervention or regulations.  But implementing a uniform solution would require a new law, although the law would require very little active regulation.  

Do you have a different solution?

Do you have a modification of the proposed solution?

What kind of behavior would the proposed solution cause?  Critiques?

The primary factor compelling pay restriction is the proliferation of 401(k) retirement plans in American employee’s compensation plans.  With the popularity of mutual funds, specifically index funds, a large percentage of Americans now own a small piece of hundreds of public companies.  However, by design, these investments are without management in order to keep investing fees to a minimum.  The lack of management allows board of directors and CEOs to compensate themselves without restriction.

While the “passive” index funds increase in popularity, by dilution, the “active” funds have more voice in company decisions.  But because active funds usually hold stocks on a short-term basis, accordingly, those funds have only short-term earning perspective.  In short, the voice of long-term investors is being squeezed out of publicly traded companies.

More and more Americans are becoming 401k investors and are increasingly dependent on their accounts for retirement.  As a result, the executives of publicly traded companies have taken the role of a trustee of the American public’s money.  Should these executive reward themselves with earnings of 300 times more than the average worker when their increasing compensation levels show no correlation with stock performance?  Because CEOs are proving they cannot be trusted, the time has come for Restrictions on Executive pay. 

The first major argument against limiting executive pay is that anybody who is being significantly undercompensated for her ability will simply go to another company or work for a European bank.  So any proposal to limit executive pay will have to face the realities that big US companies need to attract top talent in order to thrive.

A second argument against limiting executive pay is that executive pay is a drop in the bucket compared to actual earnings.  I concede that executive pay is a drop in the bucket compared to actual earnings, but when companies are earning LESS THAN ZERO (like losing BILLIONS of DOLLARS), then this argument is no longer sound.

The third major argument for against limiting executive compensation is that executives already do what is in the best interest of the company because their compensation is tied to stock options.  This is true, but with the caveat that executives do what is in the best interest of the company for AS LONG AS THEIR STOCK OPTIONS INCENTIVIZE it.  Therefore, if the compensation plan incentivizes that the stock options be excercised two years out, the executive will run the company to maximize the share price in the next two years.  However earnings for the company in the next two years may not be the best thing for the long-term health of the company, which is what 401k investors care about.

My criticism of the third argument is that yes, executives are incentivized by stock options to do what is best for the company, but this strategy simply promotes risking company money for personal gain – the lure of lucrative stock options dwarfs the fear of failure.  To put this in some perspective, let’s take a mid-level manager making $75,000 per year.  His contract states that he will get a 25% commission on profitable contracts that he closes.  An extremely risky contract that will be worth $10M is proposed by a Chinese company.  Because the contract is for pseudo-military equipment, the shipments will be subject to restrictions imposed by the department of commerce.  Lured by the attraction of receiving a $2.5M bonus, the manager ignores the risks, signs the contract and starts an engineering and production effort to build the required product. 

After a huge cash outlay, the product shipments are seized by the commerce department and not allowed to be sold to the customer.  The manager is fired for taking on so much risk.  However, confronted with the opportunity to earn $2.5M compared with the fear of losing his job, the manager chose the high risk for the company because of the potential personal reward.  After all, the manager will likely be able to find another job at his previous earnings.  On a much larger scale, executives face this same dilemma.

Part II will look at what solutions have already been implanted and discussion of what an ideal solution would look like.

I went to the first game Griffey was back in Seattle when he came back in 2007 as a Red.  I bought tickets in right field, made a sign that said “Safeco, the House that Griffey Built.”  It was an amazing dose of nostalgia.  I’ll be there in Cooperstown when Griffey is elected into the HOF.

However, if Griffey signs, the M’s will have to make some very hard decisions.  Griffey isn’t half the player he used to be and having him back for a full season will be like watching your parents get old.  The Mariners will compromise their decision making because they will be bound to play Griffey over younger players that deserve playing time.  Benching Griffey would be like taking the car keys away from your elderly parent.  The Mariners must keep a good relationship with Griffey in order to have him wear their hat in Cooperstown.

Instead, the Mariners should just let Griffey sign with Atlanta.  If both teams are out of the playoff chase in August, the Mariners should trade for Griffey and give him a 6-week victory lap.  This will avoid the complications of orchestrating Griffey’s playing time among the youger players for a full year, and still let the Seattle fans see him one more time.

My old blog is no longer with us.  It was being hosted on one of my friend’s servers until he changed servers and left my blog to die on the old server.  Losing all that wonderful political, economic and personal content really sucks.  I feel somewhere in between my dog dying and getting my car broken into.

I bought my own web hosting so hopefully that will not happen again.  It may take a while for me to get all the blog links back up and running, but when I do, I will write some more posts.

Until then.

I have to admit, when I read Obama’s tax policies, the fiscal conservative in me hurts inside.  Why would we give people who aren’t paying taxes a refundable tax credit?  Normal tax credits only apply as a discount to your taxes.  Refundable tax credits are esentially checks from the government – the redistribution of wealth.  See the Wall Street Journal for further information.

http://online.wsj.com/article/SB121910303529751345.html?mod=most_emailed_day

So you know what I hate about the plan – people who pay zero taxes will now get a welfare check to take home.  Additionally, Republicans and capitalist cry out that taxing the rich just impedes growth and true growth is achieved by trickle-down, Reagonomics.  Really?

I think it is time we recogonize that the world has changed since 1980.  Consider that 2/3rds of the American economy is now consumer based.  It make sense to stimulate the economy by giving tax breaks to the poor and the middle class.  They will all buy their ipods and other consumer goods, which will boost our consumer driven economy.  What good does it do to give corporations tax breaks so that they can produce products that no one has money to buy?

For you trickle-down/Reagonomics fans, consider that Obama’s 20% capital gains tax is lower than the capital gain tax in the Reagan administration. Obama’s plan taxes the income of the rich, not the investment of the rich.  If anything, raising the income tax forces rich people to invest their money in order to be taxed on the lower capital gains tax.

Most people who discern the “redistribution” element of Obama’s plan feel that it isn’t fair.  Well it’s also not fair that a CEO works for 17 days and then gets a $28M parachute the same day the company goes to zero at the expense of my grandpa’s retirement.  See WaMu, 2008.  I’ve been trying to come up with a fair “capitalist principled” plan to limit pay for CEOs who unethically drive their company into the ground.  Well, one way to put the money they wasted back into our retirement accounts is to increase taxes on their unconscionable compensation.

It’s not fair that Warren Buffet’s secretary pays a bigger percentatge (33%) of her income in taxes than Warren (18%).  Rich people have accountants, attorneys and advisors to manage their wealth.  They shelter, level-load, invest and shift their money in order to pay the least tax on it.  The result is that most rich people have an effective tax rate of 8 – 15%.  Even after Obama’s raises their taxes, they’ll still be paying less than you!

Lastly, we need to raise taxes in this country.  We are $10T in debt and that debt is not going to go down without raising taxes.  (Spending is another issue altogether) Obama is taking advantage of the fact that rich people pay most of the taxes in this country and he is leveraging their ability to pay off the debt.  The taxpayer bailout, economic policy and foreign policy that have promoted corporate and personal wealth are responsible for the nation’s debt.  Obama is handing them the check – do not obstruct!

When he was eighteen, Jack signed up to be in the armed forces.  In the military, he became an incredible swimmer, a deadly marksman and was trained in the art of hand to hand combat.  He had superior training, equipment and weapons and was lethally proficient in air, sky and ground missions.

After the military, Jack went to Stanford to become a doctor.   After residency, he opened up his own practice.  Jack was an amazing physician and people came from far away to see him.  He even gave his services for free to people who couldn’t afford it.  In order to manage his practice, Jack went to Harvard to get his MBA.

One day, after Jack had finished his MBA, the river in Jack’s town overflowed its banks.  Everyone looked to Jack for leadership.  Jack devised a plan to patch the dike.  Jack financed the emergency measures himself because he didn’t want his business to be flooded.  The community recognized him with a big article in the paper.

Soon after that, there was a domestic dispute two doors down in Jack’s neighborhood.  None of the neighbors knew what to do, but they knew Jack was proficient in all forms of fighting.  His neighbors said, “Jack, please break up the fight.  We’ll be right behind you.”  Because of his superior skills and equipment, Jack was able to successfully break up the fight.  Again the community was glad they had Jack.

Jack was also a philanthropist.  He donated his time and money so that a boy in his neighborhood could have a special surgery to help remove some scarring on his leg.

Jack was very proud of all he accomplished.  He held an MBA from Harvard, was a Stanford trained physician and was trained and equipped by the best military minds. His access to the best medical supplies gave him great personal satisfaction and his business and investment generated obscene amounts of wealth.  Jack also had a beautiful family with his lovely wife Jennifer, his little boy, Jeffrey and his little girl, Brianne.

Jack become known around the community as the “go to” guy for intervening in disputes, paying for projects or paying for medical procedures for needy individuals.   Jack felt a certain expectation to do everything in the community even though there were plenty of other capable individuals who could do the job.  However, Jack’s pride wouldn’t let him defer to anyone else.  After all, he was the number one economic producer in town.

In one particular crisis, Jack was called upon to provide expensive medical supplies to an outbreak of a deadly disease.  He couldn’t actually afford it, but he didn’t want to hurt his pride so he just borrowed some money from his daughter’s college fund to finance the supplies.

One night, there was a particularly violent domestic dispute in the neighborhood.  Per their custom, the neighbors got Jack out of bed to diffuse the dispute.  Jack broke down the door to the dispute and found himself in a bad position - a man had a gun pointed at Jack’s head.  He was in a bit of a quagmire, but he knew that he could simply buy his way out of the mistake.  He gave the man a large sum as a ransom for coming into the man’s house with no exit strategy.

In order to pay the ransom, Jack sent Jennifer to work full time.  It would only be temporary that he would run at a deficit in order to pay for the ransom.  Even after sending Jennifer to work and stealing from his daughter’s college fun, Jack kept taking on responsibilities he couldn’t afford.  All the responsibilities he took on were detrimental to his family, but he had to maintain his image and be consistent with his rhetoric that he was the strongest person in the community.