Pay Brain Drain?

November 4th, 2009 - 1 Comment

Pay czar Kenneth Feinberg acknowledged concerns on Monday that his mandated executive compensation cuts at bailed out firms may cause some talent to leave these firms for those not facing pay restrictions.

In his latest column, Smeal’s J. Edward Ketz questions this assumption that talented executives will jump ship:

I find it amusing to hear the arguments of bank managers and directors.  Their major complaint is that the administration’s cap on executive salaries will drive talent away.  That is such a self-centered argument!  If they cannot live comfortably on $500,000 per year, then I really feel sorry for them.

But wait—aren’t these the same guys who misunderstood the nature of the derivative instruments that their firms were dealing in?  And didn’t these managers make faulty decisions with respect to the housing market and counter-party risk?  In short, didn’t these executives bring their own firms to the brink of destruction?  Given the foolish and reckless behaviors of these managers, one has to ask what talent they are talking about.  If this is talent, let’s give some untalented people the chance the run these companies.  They couldn’t do worse.

Besides, where would these executives go?  Before these talented people leave their firms, they would desire other positions with salaries greater than $500,000.  I doubt that there are enough open positions that pay that much for so many executives.  The labor market is slim for this end of the pay spectrum.

And there are other people who could easily replace these businessmen and who could do a credible job.  For example, competent university presidents must have great managerial skills.  With a median salary of $427,400, some of them might be willing to accept the new challenges of running a bank.  And take a pay boost.

There are several legitimate concerns about Obama’s intervention into the pay of bank managers and others who accepted government bailouts.  But, concern over the flight of talent is not one of them.

Tags: Executive Compensation, Ketz, Politics

This entry was posted on Wednesday, November 4th, 2009 at 12:20 pm and is filed under News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

One Response to “Pay Brain Drain?”

1. John Myers says:

   November 6, 2009 at 10:48 am

   Would YOU want to hire someone who just helped run their previous employer into the ground?

   The only problem with that previous statement is that the demise of the financial sector wasn’t caused by the rank & file employees of the company … but rather by their top management. Far too often, top management is protected and lower level employees are punished for strategic mistakes.

   At the same time, I would strongly encourage any employee who feels that they are being paid unfairly or who are on a sinking ship to “vote with their feet” and leave. I did so twice early in my career … because in both cases I could see coming train wrecks in their future. One ended in a bankruptcy filing, and the other ended up in a “near death” experience … both coming situations were easily recognizable by any astute lower level employee.

   Since I left the second firm 26 years ago, I have been responsible for my own financial destiny.

   FEW in the automotive industry “Big-3″ left the industry even though both management and union employees saw that they were on the Titanic with the iceberg dead ahead. The reason who they didn’t leave is that they knew that they couldn’t earn comparable wages anywhere else. THE SAME IS TRUE FOR THE FINANCIAL INDUSTRY TODAY.

   When the UAW recently had to take GM stock to fund their health care trust, they asked “What will guarantee the stock”. They didn’t like the answer that their collective actions would play a significant role in their own success or failure.

   Welcome to being an owner of a company!

   When there is a “downsizing”, how often do companies actually look at the people who are being let go … as opposed to the dictates of some spreadsheet-twirling number cruncher who declares that “I need a 10% cut across the board” … not considering the performance of individual business units or the roles that individuals play in keeping the business operating on a day to day basis.

   In a recent engagement, my company was brought in because a business unit was not being effective in their day to day operations. What became clear was that the core reason for the problems was that the people who “knew what was happening” had been left go in a recent downsizing. The retained employees had no clue of the day to day procedures … let alone the critical exception procedures. It was clear that this was a “cut by the numbers” rather than a “cut that preserves effectiveness”.

   The punch line of this post is that Ed Ketz views management as being interchangeable. I strongly disagree. I respect Graham Spanier, but would not want to see him running my bank! One of the reasons for the demise of GM is that it was run either by “financial managers” or “great marketers brought in from outside”. They ran GM into the ground by either “saving nickles per car” or “putting lipstick on a pig”. Neither were the “car guys” … who would have produced cars that people would have wanted to buy … rather than felt that they HAD to buy in order to support the American worker!

   Struggling companies almost always are saved by increasing revenues … not by cutting costs!

   Rather than punish everyone in the financial industry … the guilty ones should be identified and fired … and be condemned to a future career of working as seasonal help for a landscaper! (just joking … I do believe in redemption and the value of learning from mistakes … from those who are modest enough to admit them).

   Sorry for the rant … but this struck a nerve with me!