Nice Work if You Can Get It
The Washington Post takes a look at Fannie Mae’s new board. Dean Baker takes a look at the Post’s skewed priorities:
The remarkable part of this story is that the Washington Post reporter could not find a single person who thought that paying part-time workers $160,000 a year was a bad idea. There is absolutely no one cited in this piece who raised a question about the compensation levels for the board.
Keep in mind that this is a newspaper that is absolutely apoplectic over autoworkers getting $27 an hour. If we assume that the board members on average will devote 500 hours a year to their board duties, this puts their pay rate at $320 an hour.
Look, super-high salaries for the already wealthy equal necessary incentives for prosperity. Relatively high wages for the working class equals productivity destroying union malfeasance. That’s not really so hard to understand, is it?
32 Responses to “Nice Work if You Can Get It”
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December 26th, 2008 at 10:27 am
I know the figures does seem outrageous, but perhaps we should recall that the Communist principle was “from each to his ability, to each to his need.” If we were simply to compare the wages of auto workers and board members, and make conclusions based on that, we would inadvertently sink into the Communist principle, as the only comparative thing between those individuals when it comes to compensation is basic human need.
Otherwise, they ought be paid by their abilities and economic valuations.
December 26th, 2008 at 10:51 am
I think this is incredibly unfair, on multiple levels.
First of all, Baker is way out of line for holding the Post’s reporters accountable for the views of its editorial board. The two have nothing to do with each other. And does Baker really believe that it’s a good idea for reporters to first decide their views on the subject, and then to start calling around to find someone who is willing to parrot those views? And why does he think that the article approves of the compensation? That’d be a valid critique if Goldfarb had quoted an expert saying something approving of the move, and not balanced that quote in any way. But the flaw in this article isn’t that it’s slanted, it’s that it’s shallow. Goldfarb doesn’t provide any real background, nor does he seek analysis from experts. There are no quotes regarding the compensation, either way. It’s just a rushed piece of reporting, phoned in on Christmas Eve.
Beyond that, I happen to think substantial cash salaries are a great idea for a board of directors of a Fortune 500 company. One of the problems of the past decade has been the compensation of boards with grants of stock or options. The old Fannie board received both. That gave them the same set of incentives as management - to place short-term gains in stock value ahead of sound governance. And, in other cases, it’s sometimes yielded truly obscene payouts.
Cash payments, by contrast, retain the same value, irrespective of corporate performance. I think the old thinking about “aligning incentives” is now permanently discredited. I don’t want corporate directors to have the same incentives as shareholders or management; would anyone think of paying auditors with options? I’d much rather see them regard themselves as outsiders, fairly compensated for their time and effort, but without a financial stake in the success or failure of the corporation.
It’s nice to think these people are going to do this out of the goodness of their hearts, but taking these duties seriously is a time-consuming proposition, and most of these folks aren’t making much money at it relative to their overall wealth. (Diana Taylor, for example, is the girlfriend of one of the wealthiest men in America. Now that’s an angle I would have loved to see the Post pursue.) If you pay a pittance, people tend to regard their reciprocal obligation as equally small. Pay more, and people tend to feel obligated to do more in return. It’s just human nature.
One other point. Fannie’s board was among the hardest-working in corporate America - meeting more than twenty times a year, with members obligated to attend at least three-quarters of the meetings. It’s reasonable to question the results, which were disgraceful. Clearly, the frequency of the meetings had nothing to do with the quality of the oversight. But still, these people aren’t just lending their names to the corporate letterhead. They’re going to spend a substantial amount of time meeting, and if securing the service of qualified people takes a couple of million each year, it’s cheap at the price. Think of the hundreds of billions in value that Fannie and Freddie destroyed due to their lack of meaningful oversight, and it’s money incredibly well spent.
December 26th, 2008 at 11:05 am
sigh… Everything old is new again. John Kenneth Galbraith put it better when he said:
December 26th, 2008 at 11:06 am
I don’t want corporate directors to have the same incentives as shareholders or management
December 26th, 2008 at 11:19 am
We’re run by oligarchs.
December 26th, 2008 at 11:26 am
Dave:
What about my other question? Why not pay auditors or regulators in slow-vesting stock, so that their incentives will be aligned with those of the shareholders they’re ostensibly serving?
We used to think of corporate boards as management - that is, as the providers of strategic direction, and the hirers of those who provided tactical, day-to-day management. In that schema, it made some sense to align incentives. What I’m suggesting is that virtually no modern corporate board still functions in such a capacity. Management rules, setting both strategic and tactical direction. Corporate boards, to the extent they still serve any purpose, are perhaps better regarded as an oversight mechanism. They have the power to review decisions, to approve major shifts, and to ensure the company is running on a sound basis.
If we want boards to provide strategic direction, we should ensure they hold chunks of stock, or otherwise align their compensation with corporate performance. If we want them to provide effective oversight, and to act as a check upon management, we need to compensate them in ways that aren’t dependent on the vicissitudes of the stock market. But we really can’t have it both ways. I think that’s one of the key lessons of the past decade. The ambiguous position in which corporate boards typically find themselves - somewhere between oversight and leadership - leads them to discharge neither responsibility efficiently. Compensation packages serve as a tacit signal of priorities.
And do you really want a full-time corporate director? The problem with that is that if a person’s livelihood depends on remaining within management’s good graces, it tends to affect their judgment. And make no mistake - management is typically very effective at replacing dissident directors.
The best solution, I think, would be moving to something more closely resembling the audit system. All corporate directors of publicly traded companies should be required to undergo training and certification. Outside directors should be able to serve only on a strictly limited number of boards. Ideally, they’d function more like auditors - specialists, hired to perform a crucial oversight role, who make the performance of that task their primary occupation. We might even see situations in which firms were hired on a contractual basis to provide directors. We have law firms which follow that model for legal advice; accounting firms which provide accountants; why not governance firms that provide directors?
December 26th, 2008 at 11:46 am
“they ought be paid by their abilities and economic valuations.”
And, of course, those valuations are entirely based upon objective determinations, independent of class bias or financial self-interest.
December 26th, 2008 at 11:53 am
Not exactly. The board is supposed to be there to hire the management to run the company, and to represent the shareholders so that management runs the company to the benefit of the shareholders. Unfortunately, you end up with situations where management is just shoveling cash into their pockets, and the board is letting them do it. It’s regulatory capture only different. I remember from years ago that the average board member served on somewhere between two and three boards. And these are the guys who are supposed to make sure that the company doesn’t turn into an Enron.
The problem I have with stock as compensation is that it is too easy to create short term profits that then go poof in a few years (as in the case of the IBs) or in a few decades (the big three) time. Not to mention that the stock price will follow the overall direction of the economy, so you can be the best damn manager/director/regulator or whatever, but if you started work in 2007, any stock compensation you have is getting crushed.
Regulators and auditors need to get paid on how well they do their job. Something which should have nothing to do with how well any stock is doing. Management, in theory, can get paid with stock, but without clawbacks and the like, there is too much incentive to make decisions that work out well one year (resulting in phat l3wt) while causing an implosion the next. UBS has a new compensation plan in place that is more in line with what I would want to be the standard.
December 26th, 2008 at 1:15 pm
If we assume that the board members on average will devote 500 hours a year to their board duties,
This would mean 10 hours per week on average, which I can’t believe. And most especially can’t believe it for the board members who are still employed as senior excecutives at other companies — where would they find the time?
Outside director status is an honorific in many instances, a nicely-paid reward to distinguished people for previous often irrelevant service in return for acting as corporate window-dressing. Much in the spirit of having distinguished people who don’t know you but owe a favor to someone you do know write college recommendations for you.
I’m not saying that this applies to all outside directors, I’m sure there are many who work very hard and do a great job. But I’d be willing to up the pay greatly for outside directors if the companies in question would also eliminate directors’ liabilty insurance. No doubt a lot of potentially excellent directpors would not come on board under these circumstances, but you could bne pretty confident that the threat of being personally financial liable would mena that whatever directors there were would be paying very close attention to corporate activities.
December 26th, 2008 at 1:19 pm
Al is right. This doesn’t seem like a scandalously huge wage at all. It’s certainly less embarassing than all of the part-time boards and committees in California state government where termed-out legislators can make six figures for zero work.
December 26th, 2008 at 1:22 pm
Stephen Myles St. George Says:
December 26th, 2008 at 10:27 am
Otherwise, they ought be paid by their abilities and economic valuations.
If there is one thing I’ve learned over the past 8 years, it’s that the people in charge of everything are certainly paid according to their extra super awesome skills and we should thank them every day for the leadership they have shown and continued economic growth from which we are lucky to lick up the drops that trickle down.
After all, what is more valuable to society than people sitting on a corporate board or working in the financial industry?
December 26th, 2008 at 2:43 pm
This isn’t “wages”. This isn’t “salary”. It’s “compensation” or “remuneration”. In the best union tradition, that’s a differential: it’s Rich People Money, and paying it signals to the corporate world that you’re one of them.
December 26th, 2008 at 4:10 pm
$300/hour doesn’t seem like an outrageous wage to me. Presumably these are highly experienced professionals, with specialized knowledge and experience, in high demand. For those that are attorneys or accountants, $300/hour is perhaps half what they’d bill as partners in a prestigious firm.
Of course, the boards here didn’t do such a good job — but the financial difficulties aren’t due to the board compensation scale.
December 26th, 2008 at 4:42 pm
Obviously they deserve their pay and short work week (and whatever benefits go with it)–Fannie Mae has been doing so well that there isn’t really much that such extraordinarily gifted people can do to make things worse.
December 26th, 2008 at 4:44 pm
Where do people get the idea that the board will actually do 500 hours of work per year? That would peg it as consuming 25% of your billable hours. It’s not that the wages for so little work are absurdly high considering the work they do (they are). It’s not that boards of directors do a poor job and are in the pocket of the CEO (also true). It’s that, ultimately, a few million to spend on handouts to board members is a rounding error on the corporate balance sheets. When you’re spending the money of shareholders, blowing a few million of $160k/yr salaries for board members doesn’t seem like a big deal.
December 26th, 2008 at 5:12 pm
I’m curious where Dean Baker thinks we’d get qualified directors for a giant company if they paid substantially less.
I would guess that graduates of several schools in Bangalore would do as good a job for less money.
December 26th, 2008 at 11:22 pm
People do seem to be blissfully aware of the fact that compensation for top executives and directors account for what, less than 1%, actually, I’ll venture, less than 0.1% of a major corporation’s costs?
Goodness sakes, a sense of proportion would be well advised.
December 27th, 2008 at 8:28 am
I note a distinct inability for many people to grasp Baker’s main point.
Hint: It’s not that the board members were being paid too much or that they were only (listed as) working part time.
December 27th, 2008 at 9:39 am
Ah, Christmas break, where all the econ students home for the holidays can spew out their newly acquired knowledge of theory . . .
December 27th, 2008 at 12:34 pm
I note a distinct inability for many people to grasp Baker’s main point.
I grasp the main point, i.e. the matter of competence; however, Matt Yglesias was focusing on something else in his post, namely the salary figure.
And frankly, I just think it is un-American and socialistic to argue that people have too much money. The way to help the poor is not by robbing the rich. This is the 21st century, not Robin Hood.
December 27th, 2008 at 4:02 pm
So, it’s ok to wonder if UAW workers are earning more than the value of their labor, but not corporate management, because the latter - but not the former - kinds sorta sounds like socialism.
That kinda sorta sounds like red-baiting to me.
December 29th, 2008 at 2:56 pm
Don’t we want good people to serve on boards of companies like Fannie Mae? If you were an experienced hand in the financial services sector (i.e., likely well off already), what would it take for you to assume the massive responsibility and risk of being on this Board? Surely more than a meager $160,000. They must be doing it out of a sense of public service.
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