CEOs are paid for performance

In response to my recent article, some commentators (like this one) are prone to say, "Sure, actors, authors, and athletes deserve their good fortune, because they get paid well only if they produce, but hefty CEO pay is unfair because it is not based on performance."  Before you are tempted to make that argument, please make yourself familiar with the facts by reading this paper:

Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts and Challenges
Steven N. Kaplan

Abstract:

In this paper, I consider the evidence for three common perceptions of U.S. public company CEO pay and corporate governance: (1) CEOs are overpaid and their pay keeps increasing; (2) CEOs are not paid for their performance; and (3) boards do not penalize CEOs for poor performance. While average CEO pay increased substantially through the 1990s, it has declined since then. CEO pay levels relative to other highly paid groups today are comparable to their average levels in the early 1990s although they remain above their long-term historical average. The ratio of large-company CEO pay to firm market value is roughly similar to its level in the late-1970s and lower than its pre-1960s levels. These patterns suggest that similar forces, likely technology and scale, have played a meaningful role in driving CEO pay and the pay of others with top incomes. With regard to performance, CEOs are paid for performance and penalized for poor performance. Finally, boards do monitor CEOs. The rate of CEO turnover has increased in the 2000s compared to the 1980s and 1990s, and is significantly tied to poor stock performance. While corporate governance failures and pay outliers as well as the very high average pay levels relative to the typical household undoubtedly have contributed to the common perceptions, a meaningful part of CEO pay appears to be market determined and boards do appear to monitor their CEOs. Consistent with that, top executive pay policies at over 98% of S&P 500 and Russell 3000 companies received majority shareholder support in the Dodd-Frank mandated Say-On-Pay votes in 2011.

Ballroom Dancers 1, Anti-PRC Vietnamese Protesters 0

We can dance if we want to / We can leave protesters behind...

This has to be my favorite Southeast Asian country versus China story of the year so far: Vietnam deploys dancers to foil [anti-PRC] protests says the headline. You see, the Vietnamese have a monument dedicated to Ly Thai To--the king who moved the capital to Hanoi--in the center of the capital. Protesters have usually made a beeline for the statue to commemorate conflicts of national importance. China's invasion of Vietnam in 1979 was provoked by Vietnamese forces in turn invading Cambodia to oust the Khmer Rouge that was said to be destabilizing Vietnam.

Expecting the protesters to come to Ly Thai To's statue to mark the 35th anniversary of the Sino-Vietnamese conflict, it appears Vietnam's leadership were a step ahead this year. When the protesters came, their speeches were drowned out by L-O-U-D aerobics classes [!] and the space they usually occupy was already taken up by ballroom dancing couples [!!]:

Anti-China protesters hoping to lay wreaths at a famous statue in the Vietnamese capital on Sunday were obstructed by an unusual sight of ballroom dancers and an energetic aerobics class held to a thumping sound system.

The demonstrators suspect the government deployed the dancers as a way to stop them from getting close to the statue and make their speeches inaudible. The few who tried to get close to the statue of Ly Thai To, the founder of Hanoi and a nationalist icon, were shooed away.

The protesters were marking the 35th anniversary of a bloody border war between China and Vietnam, where anger over Beijing's increasingly assertive territorial claims on islands in the South China Sea that Hanoi insists belong to it is already running high.

Outsmarted! Given the tense nature of Sino-Vietnamese relations over islands in the South China Sea, why doesn't Vietnam like using China as a whipping boy to relieve pressure?

1. The Vietnamese still claim ostensible solidarity with their fellow communists in China, hence their reservations in airing differences in public.
2. As the article correctly explains, while displeasure may be aimed at China, there is wariness that popular discontent can be redirected towards the Vietnamese leadership.

Apparently, these tactics are not new, either:

Nguyen Quang A, a well-known dissident, and others attending the rally in Hanoi on Sunday said the government deployed the dancers at the statue of Ly Thai To, and at another statue nearby, to prevent them gathering there. The tactic appeared to be part of a low-key approach to policing the event to avoid confrontation. There were scores of plainclothes security officers at the rally, but very few wearing uniform. Quang said he asked the dancers to stop for a few minutes but that they refused.

Whoever said apparatchiks can't be nimble on their feet?

On the Iron Men of Wall Street

Commenting on my recent column, Paul Krugman wonders if I somehow missed the financial crisis of the past few years.  He seems to think the crisis proves that the titans of Wall Street earn much more than the value of their contributions. 

I will be the first to admit that measuring the social value of the financial sector is hard.  But let me offer a few observations:

1. In thinking about the social value of the workers in the financial system, it is as important to keep in mind long-run growth as well as short-run fluctuations.  Financial intermediation plays a key role in growth.  And a case can be made that for human welfare, growth swamps fluctuations.  (Robert Lucas most famously made this argument.)

2. It is too facile to blame the financial crisis entirely on Wall Street.  In the recent edition of my favorite intermediate macro textbook, there is a case study of who bears responsibility for the crisis.  It concludes there is no single culprit but lots of blame to spread around. (See page 580 of Chapter 20.)

3. It would be a mistake to think that the rich had it easy during this crisis.  According to the Saez-Piketty data, during the downturn from 2007 to 2009, average income fell 17 percent, but the incomes of the top 1 percent fell 36 percent.  Wall Street titans at the center of the crisis such as Dick Fuld and Hank Greenberg reportedly lost 90 percent of their net worth.  To be sure, they started off at a much higher base than most people, but let's not pretend the bankers got off scot-free.

On Stanley Fischer

Wellesley College's Joe Joyce reviews Stan's qualifications to be the Fed's Vice Chair.

PRC & IP: Imitation, Flattery, Copycat Culture

There's an interesting article from the Commonwealth publication Global: The International Briefing which goes into that age-old question of why the Chinese are not especially innovative despite having the world's second-largest economy. In short, why are there no globally-recognized Chinese brands? Also, why are many indigenous Chinese products and services me-too efforts without any real distinction from what everyone else makes?

These two questions have spawned alarm about Chinese development. First, there is little value-added in churning out commodities, possibly ensuring that Western concerns will continue to dominate in terms of where the real money is made--branding, design, and marketing. Second, China may be making itself vulnerable to legal challenges on the intellectual property front. Anyway, to the oft-cited socio-cultural roots of imitation:

China’s existence is premised on these calculated approaches to life. To succeed in public life in the past, the state originated a civil society exam-based system conducted at every level of the Chinese administrative hierarchy – after all, the highest civil status below the emperor was often the ‘grand tutor’ – and if these rigid examinations were passed at a series of levels, then the student was qualified to rise up the imperial chain. Most of these tests – just like the Chinese language itself – are premised on memorising, uniformity and repetition. With such foundation stones laid to honour the art of duplication, it is hardly surprising that it has been hardwired into the social system.

This is reinforced by the traditional master-student relationship within schools and universities where, all too often, copying is the default position. Students at university will regularly copy out essays from the internet and present them, uncited, in all innocence. In their view, there is nothing wrong with plagiarising the ‘correct answer’ from a respected expert, instead of spending time trying to give their interpretation of the answer that could be wrong. Seen through Chinese eyes, copying is not only sensible, but it is a symbol of respect for authority and, importantly, it is a way of passing the test.

There is thus an innate conservatism in how the young are taught. Take, for instance, architecture:

China’s social structures, policies and perceptions are engineered, as far as possible, so that new ideas do not rock the boat – at least, that they do not undermine the leadership position of the party. Unsurprisingly, the education industry lays the ground rules by rigidly teaching children to copy, to repeat, to trace.

School students, for example, learn an impressive set of artistic skills, but after years of study each student has merely learned to draw the same object for days and weeks until they ‘succeed’ in the acceptable portrayal of the object. They have been taught to draw particular objects – and only these objects – in a ‘correct’ way. For them, the aim is to ‘get it right’ rather than ‘have a go’. As a result, the system is designed to reinforce a process of engaging people to hone visual memory and regurgitation: it is but a short step to architects copying alluring Western projects.

It's a spin on the idea that imitation is the sincerest form of flattery, but IP laws unfortunately mean that those being copied do not necessarily see this as a compliment.There is hope, though: since the state is omnipresent in Chinese life, there is probably no better way to begin recognizing innovation than through administrative fiat:

It was fewer than ten years ago that China changed the country’s constitution to enshrine private property rights. Nowadays, the China Daily newspaper even has an IP channel that provides comprehensive reports on current and future trends in IP development in China. As part of this professionalised approach to patent rights, for instance, anyone – from a foreign company or an individual – who contributes to a patented invention that is made or completed in China is eligible for the Chinese government inventor reward and remuneration for abuse of these property rights. There has been a spate of legal cases recently, such as the defendant in Suzhou who was sentenced to a year in prison and a US$12,000 fine for counterfeiting Louis Vuitton and Gucci trademarks. But nobody is stealing too many Chinese design secrets… yet. 

There are promising signs in other sectors. For instance, Chinese smartphone brands are doing well at home even against the likes of Apple and Samsung, and it is probably a matter of time that they will tackle foreign markets too with designs that are value precisely because they are Chinese-designed.

Defending the One Percent (Again)

Click here to read my column in Sunday's NY Times.  I expect this one will generate more than its share of irate letters.

Obamacare versus Romneycare

One of the themes that we have all heard over the past few years is that President Obama's healthcare reform is merely bringing the kind of changes Massachusetts had under Governor Romney to the nation. If that were really true, you would think that these national reforms would have minimal impact on the state of Massachusetts. Well, here is a story from today's Boston Globe:

About 50,000 health insurance applications, many filed by low-income Massachusetts residents, have yet to be processed by the state’s troubled insurance marketplace, officials disclosed Thursday, and it may take months to get all these people enrolled in subsidized plans. 

For several months, residents have been encouraged to file old-fashioned paper applications because the state’s insurance website has been hobbled by error messages and has crashed frequently since it was revamped in October to comply with the more complex requirements of the federal health care law. 

Frustration with the broken Massachusetts Health Connector website and the paperwork backlog was evident Thursday, when Jean Yang, the agency’s executive director, wept as she told the Connector board how demoralized her staff is.