Allen Iverson, the explosive scoring guard, was traded from the Denver Nuggets to the Detroit Pistons yesterday. Iverson was traded, in part, because he never won a playoff series for Denver and in part because he was still a powerful scorer who could be a valuable asset for the Detroit Pistons, who hope to return the NBA finals. Those are two small factors. Iverson was really traded because he is scheduled to earn $22 million this season the final year of his contract, meaning Detroit suddenly has $22 million to lure younger talents.
Allen Iverson was given that exorbitant contract to perform two jobs: The first, bring paying fans to the stadium. The second, win a championship. By the end of his tenure in Philadelphia, where he originally received his contract he wasn’t doing number one. And he never accomplished the second objective in either Philly or Denver. So, why isn’t the government furious about his—and others’—compensation? Sports are intertwined with government policies. Taxpayers often fund the building of stadiums.
The reason the government, and most people, aside from the cranks that call into sports radio, isn’t loudly decrying sports pay making it a campaign issue, is that the world accepts the high salaries of sports stars. They are paid what the market determines they are worth. If the Yankees will pay hundreds of millions of dollars to a few players, there’s little to be done but shrug and say, “That’s what they thought the player was worth.” And by the way, when did they last win a championship?
While it is a bit apples to oranges, the same logic applies to Wall Street. If firms want to pay outrageous compensation to failed execs, then so be it. That’s their problem. Pay Dick Fuld all you want, and watch your firm crater. It’s become more personal because of the bailout funds, but it is still foolish to think that the government deserves to meddle around with the pay of Wall Street executives—or executives from anywhere really.
We sincerely hope this issue goes away, it’s a tiny thing to squabble over in the midst of a global economic meltdown. It appeals to the most base instincts in people, and does little to right this sinking ship.
Yet, according to Andrew Ross Sorkin, its an issue that won’t go away anytime soon. This is an idea he thinks could work to fix the executive pay problem:
NYT: [Raghuram G. Rajan, a professor of finance at the Graduate School of Business at the University of Chicago and former chief economist at the International Monetary Fund] has a multifaceted approach that would give banks a choice. Under the first option, the government would strictly regulate compensation formulas. Under the second, banks could pay their executives whatever they like — provided the banks set aside more capital. In other words, banks that cling to their free-wheeling ways would have to pay some sort of price.
For Mr. Rajan, this is an either-or proposition. If banks pursue current compensation policies — what might be described as the “no-responsibility” system, given the trouble we’re in — that’s fine.
But if that happens, “the government should levy more capital requirements against the bank,” he said. Requiring banks to have higher capital requirements would reduce the risk that executives will make stupid decisions that imperil the firm and, possibly, the nation’s financial health.
How much extra capital? That depends. If banks spread out executives’ pay over, say, four years, giving their executives an incentive to make smart decisions for the long haul, the banks would be allowed to set aside a bit less additional capital.
Ditto if they included claw-back provisions and required executives to reinvest a substantial portion of their income in their companies so they had some skin in the game. Continue at NYT–>
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