24 August 2009

Greed & The Other Seven Deadly Sins ~ Satyajit Das

The Das nails it again. Anyone with brains isn't hot on ideologies, dig. Hat tip, Jesse..

Greed & The Other Seven Deadly Sins!

Greed is back already, perhaps it never went away. On the back of revived earnings, compensation for star bankers is looking up. Even signing and guaranteed bonuses are stirring.

Excessive executive remuneration is widely viewed as a symptom of ‘greed’, one of the seven deadly sins.

For some, excessive pay contravenes ideas of ‘equality’. Bankers should be paid the same as a nurse who should be paid the same as a doctor.

This misunderstands the concept of equality. Anatole France observed: “The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.” It challenges concepts of motivating achievement through reward. Objective assessment of different contributions is also likely to prove difficult.

Concern about excessive pay also focuses on ‘allocation’; ‘who’ gets ‘what’. Mark Twain once admitted: “I am opposed to millionaires, but it would be dangerous to offer me the position.”

For others, the issue is ‘proportionality’; a chief executive’s reward is disproportionate to his or her contribution.

Tight, in-bred circles of directors and consultants determine senior executive salaries. ‘Benchmarking’ exercises merely reinforce the ‘norm’ with packages being justified as ‘needing to buy the best talent’ or ‘meeting the demands of a competitive market’. Results are also easily manipulated to meet specified performance hurdles for bonuses. Recent severance payments highlight that failure is better rewarded than success.

John Kenneth Galbraith identified this pattern long ago: “The salary of the chief executive of the large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.”

But who is responsible? Many people are now shareholders, directly or through superannuation schemes. Critics ironically acquiesce in the award of generous senior executive packages. They either actively vote in favour of these contracts or fail to challenge the arrangements, as is their right.

There may be a double standard. Critics were willing to hand executive generous pay packets so those talented managers would make them richer. Many turned a blind eye to excesses when they became richer through higher share prices and dividends. George Orwell reminds us: “People sleep peaceably in their beds at night only because rough men stand ready to do violence on their behalf.”

Criticism of excessive remuneration packages ironically necessitates committing the other six deadly sins. Critics secretly perhaps ‘lust’ after the same riches that they are now censure. Their desire for increased wealth to fuel excess consumption – the sin of ‘gluttony’ – drives greed.

Critics are guilty of ‘sloth’ in their laziness in not exercising their power as shareholders to rein in compensation excesses. Critics may be guilty also of the sin of ‘wrath’ as they now indulge their righteous anger. They commit the sin of ‘envy’ as their stand may be merely resentment at those in the world who have done better.

Finally, critics are almost certainly guilty of ‘pride’, being conscious of their superiority in making their principled stand against greed.

In truth, critics are looking for scapegoats and simple answers to the losses suffered as a result of the Global Financial Crisis. This is evident in the return of large paydays as share prices have rebounded. John Stuart Mill cautioned: “Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works”.

Excessive executive remuneration is not a simple matter of ‘greed’ but symptomatic of deeply flawed economic and social systems. In their classic 1933 book – The Modern Corporation and Private Property – Adolf Berle and Gardiner Means argued that companies were akin to feudal kingdoms run by “princes of industry” consistent with their own interests. Half a century later, directors and managers (with modest shareholdings) in conjunction with, for the most part, benign investment managers still run enterprises in a manner not always consistent with the interest of ‘absentee’ shareholders.

John Maynard Keynes was aware of this: “Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.”

All systems are flawed. The real issue is their effectiveness. Unfortunately, as Keynes wrote: “The decadent international but individualistic capitalism in the hands of which we found ourselves …. is not a success. It is not intelligent. It is not beautiful. It is not just. It is not virtuous. And it doesn't deliver the goods.”

Genuine reform of executive remuneration requires understanding of the true problems and reforming the economic system rather than merely treating one of the symptoms.

© 2009 Satyajit Das

Satyajit Das is the author of ‘Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivative’. This article is based on a contribution to the Adelaide Festival of Ideas.

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