Tuesday, March 13, 2012
The Incentive Bubble
I agree that there seems to be and incentives bubble but it is my observation that it always takes a while for free people to try, adjust and maybe discard ideas. People will adjust to the incentives.
It is good to not interfere with people's rights to try new things even if they some times lead to failure or in this case skewed income and create some bad incentives. For example even if the 2008 financial collapse was due to deregulation (an open question), that does not mean for sure that the deregulation was bad. You can think of the collapse as school master. I would hope that had the politicians not bailed out the firms, that the collapse would have taught people not to lend to the likes of Lehman and the other investment banks. Very educational. It is often the case that a change in deregulation leads to very negative short term results as people are slow to adjust but the do learn.
I think that part of the incentive/compensation problem is the cultural belief in supermen. Perhaps this comes in part from watching sports where a LeBron James is a real superman who can carry a team, but business is not like that. Jim Cramer and Jack Welch, are not so important. Even Steve Jobs and Bill Gates though very good at what they do are not like LeBron James, there was quite a bit of serendipity that went into their success so paying huge compensation for CEOs is probably not a good policy. In Fact Carl Icon takes over companies and replaces the high paid CEO with one of his lower paid people and the impact is generally not negative.
Besides the the incentives problems with CEOs the incentives of mutual fund and money mangers seem particularly bad even more so than CEOs. The get paid even when the under perform the market as they usually do.
One of the big problems with trying to control executive compensation is that it is a small part of profits.
Now in defense of the overpaid in business they often do not consume much of the money that they get. Much of their money it goes into investments that make us all better off and to call for government intervention is a mistake because the incentives in government are even worse and politics evolves slower.
BTW one thing that one can do is invest with Carl Icon (IEP).