Friday, October 7, 2011

Why taxing the multimillionaires makes sense

Especially these losers:

Just last week, Léo Apotheker was shown the door after a tumultuous 11-month run atop Hewlett-Packard. His reward? $13.2 million in cash and stock severance, in addition to a sign-on package worth about $10 million, according to a corporate filing on Thursday.

At the end of August, Robert P. Kelly was handed severance worth $17.2 million in cash and stock when he was ousted as chief executive of Bank of New York Mellon after clashing with board members and senior managers. A few days later, Carol A. Bartz took home nearly $10 million from Yahoo after being fired from the troubled search giant.        

This is what “pay-for-performance” has given us:

“It’s a great irony that spectacular failure is rewarded lavishly,” John J. Donohue, a professor at Stanford law school and the president of the American Law and Economics Association, told me. “It is a terrible mistake to set up a structure where the top person walks away with millions even if the company is laid waste by their poor decision-making, yet this is what’s happening. It’s a shocking departure from capitalist incentives if you lavish riches on the losers.”

Yes, and those advocated pay-for performance would use as an excuse: “But it wasn’t implemented correctly.” Right - the only time it can be correctly implemented is in the rarefied world of theoretical models. Principal agent models should confined to the trash bin or dedicated to a journal called Journal of Pay for Performance and Why It Only Works in Models.

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