Executive Pay

Do I really want to weigh in on such a contentious issue? No. Or at least, not without another cup of coffee.

I just wanted to point out a correlation between what Paul Krugman said in his NYTimes column this morning…

“What’s wrong with financial-industry compensation? In a nutshell, bank executives are lavishly rewarded if they deliver big short-term profits — but aren’t correspondingly punished if they later suffer even bigger losses. This encourages excessive risk-taking: some of the men most responsible for the current crisis walked away immensely rich from the bonuses they earned in the good years, even though the high-risk strategies that led to those bonuses eventually decimated their companies, taking down a large part of the financial system in the process.”

…and a passage from UCSD Prof. Chalmers Johnson (whose various treatises on Japanese industrial policy have been required reading for more than one class so far):

“Morita Akio, chairman of Sony Corporation [circa 1982], believes that the emphasis on profitability has been a major cause of American industrial decline. He asserts, ‘The annual bonus some American executives receive depends on annual profit, and the executive who knows his firm’s production facilities should be modernized is not likely to make a decision to invest in new equipment if his own income and managerial ability are judged based only on annual profit.’ Morita believes that the incentive structure of postwar Japanese business has been geared to developmental goals, whereas the incentive structure of American business is geared to individual performance as revealed by quick profits.”

Johnson argues that the Japanese developmental state was predicated upon cooperation between the state and private interests — especially the strategic allocation of rewards for management other than short-term profit. The grossly oversimplified result was long-term planning, which, in addition to other factors institutional, geopolitical, and (possibly) cultural, led to the post-war Japanese economic miracle.

Of course the irony is that the industry-government kabal in the Japanese finance sector proved disastrous when their own bubble burst…

That said, what Krugman seems to be looking for is some kind of give and take between the state and the finance sector: government gives you a huge taxpayer bailout, you should respond by giving the government some measure of slack. This kind of arrangement has eluded the U.S. in every sector save the military.

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