Mad Men

I've titled this post 'Mad Men' after AMC's hit show depicting 1960's advertising executives who sell their services to create illusion in order to sell products for clients. I thought of this blog title after having read the weekend edition of the Wall Street Journal, which features a piece in the Weekend Journal section written by David Yermack, a professor of finance at the NYU school of business. The title of professor Yermack's entry is 'Keeping the Pay Police at Bay', and at first you might think it's main point is that it would be difficult for the government to set exec compensation. Sounds reasonable enough, and I'd be willing to agree with him on this. However, you have to read on to see that actually, professor Yermack, in opinion is a shill, peddling his services to create an illusion in order to sell a product for his clients. Let's read on together to find out why he is a shill, what illusion he is peddling, and who his clients are.

When you begin reading prof Yermack's op-ed, you immediately notice he is pro business, anti gov. However, I think, it is when you reach the end of the second paragraph and read, "At the G20 summit two weeks ago, important world-wide problems got shunted aside so that President Barack Obama and other national leaders could talk about executive pay", you realize it isn't that prof. Yermack feels that having gov't try to set exec pay would be difficult, it is his feeling that exec pay run amock is not an important issue at all. A feeling he confirms in the following paragraph stating, "Executive compensation ranks far down the list of our society's econcomic challenges, which include unemployment, scarce credit, and protectionism". Well, aren't there some people who might disagree and say that the concentration of weatlh in the top 1% (since 1980 the the concentration of wealth the top 1% controls has grown from 8% to 25%), the scarce credit and balooning unemployment we now face due to the outsized leveraged risk CEOs were encouraged to take due to deregulation and the short term benefits to their pay for performace packages, are in fact, serious and important issues?

Well, prof. Yermack dismisses all of this by stating, "No evidence whatsoever indicates that errant executive compensation "caused" the financial crisis of 2008, or that its reduction would prevent similar events in the future. The recent scrutiny of executive pay seems to stem from an odd mix of envy and vengeance, unsupported by facts and theories." I'd have to say that there are more than a few economists who will be responding to prof Yermack's opinion here. That there are indeed theories and facts and papers currently in the process of being published that will link deregulation, excessive risk taking, and CEO to the crash. The crash just happened, the research is still being conducted. And, is it fair to say this recent scrutiny can all be chalked up to "an odd mix of envy and vengeance". He doesn't mention that CEO pay has gone from 30x the avg worker pay to 350x the avg pay over the past 20-30 years, while pay in the middle class has remained relatively flat. Is scrutinizing this simply an "odd mix of envy and vengeance"? Managers are getting paid enormous bonuses to increase the bottom line, which in many cases, includes outsourcing jobs to Khuala Lampur, Mumbai, and elsewhere. Prof. Yermack may say, well that is good business. Well I have yet to hear why then Europe and Asia, the very place we can ship mid level jobs, can find senior level talent for a fraction of what we pay our CEOs. Why can't we outsource some of these positions? Wouldn't that be good business?

Prof Yermack consistently defends these CEO packages, never once references the fact that pay in Asia and Europe for CEOs is a fraction of the cost here, and why this is. I think he pretty much sums up his sentiment towards this issue saying, "For the large majority of companies and executives, compensation is structured rationally and provides big rewards only for creating shareholder value over sustained periods". What? Over the past year, banks given TARP money, banks barely staying afloat, continue to pay out enourmous bonuses, based on what? When their chieftens are asked, 'why are you paying out these ridiculous bonuses despite poor earnings?" These CEOs have not been responding as prof Yermack would suggest, "Well, we pay these out because we've created shareholder value over sustained periods". No, the CEOs, say something to the effect of, well, we don't want to lose all of our talent to foreign banks.. what? The foreign banks who pay a fraction of what we pay? Where are all these CEOs going to go if you don't pay them 38.2 million dollars as Vikram Pandit was paid in 2008, the head of Citigroup, a company now nearly 40% owned by the gov't, was paid? They can't all go to hedge funds.

So, I think prof Yermack might cameo on Mad Men one of these days. I think he might make a great ad exec. He works for NYUs business school, and every piece of literature that NYUs b-school sends out to prospective students touts what great connections the school has to the city's corporpate directors, CEOs, boards, etc. I don't think it would behoove NYU to have professors in their b-school running around writing anti-ceo compensation op eds. So, prof Yermack I hope your advertising campaign/op ed gets you some wonderful guest speakers in one of your classes this Fall - perhaps Ken Lewis will drop in now that he has some time on his hands and as prof Yermack himself mentioned "Mr. Lewis liquidated a whopping $173 million of Bank of America stock in the second half of 2006, when it traded around its all-time high."

Anyhow, as I close out this entry, you can check out the Institute for Policy Studies or google any of Paul Krugman's articles to hear some points contrarty to professor Yermack's. I'll also try to post a few more links to other blogs, etc that simply do what I've been doing but a lot better, and thus I will probably be posting less and considering changing the format a bit for this blog. Another note, anyone can co-post, as did TSH, just let me know what you 'd like to blog about (spares you the time of setting up your own blog.. my email is tt00136@hotmail.com) and I can change the settings to allow you to post.

TST