Friday, November 9, 2012

Pay for Congressional performance?

Sheila Bair baffles me. Every time she starts making a ton of sense, the former FDIC head says or writes something else that comes across like low-grade satire, except I don't think it is. Her most recent piece for Fortune falls into the latter camp.
Will the elections bring about improvements in our increasingly dysfunctional government? I fear not. Successfully running for office these days is more about political fundraising and negative campaigning than about the art of governing. Only one in 10 Americans thinks Congress is doing a good job, and no wonder. Our economy is stuck in low gear, and our fiscal situation is precarious. How do we motivate our national leaders to deal with these problems? As with most organizations, it comes down to economic incentives. If our elected officials can keep their paychecks by being adept at fundraising and negative campaigning, then that is what they'll do. But if at least part of their pay is based on performance, maybe we could get them to focus on doing their jobs. Pay for performance has improved management in the private sector. Why not try it with the folks in D.C.? 
For instance, one-half of compensation for corporate directors is frequently paid in stock, which they must hold for several years. The idea is to align their economic incentives with the long-term profitability of the corporation. There is no stock ownership in the federal government, obviously, but we do issue a lot of debt (boy, do we ever). So here is an idea: Let's start paying members of Congress and the President half of their compensation in 10-year Treasury debt, which they must hold until maturity. Members of Congress make roughly $180,000, so under this proposal, they would get $90,000 in cash and $90,000 in 10-year Treasuries. (We would add a housing allowance, too, given the high cost of living in Washington.) For the President, it would be $200,000 cash and $200,000 in T-bonds. If the economy does well and if they get our fiscal house in order and institute pro-growth tax and spending policies, those 10-year bonds should hold their value. But if we continue our profligate ways, inflation spikes, and interest rates skyrocket, those bonds may end up being worth as much as the stuff Czar Nicholas issued shortly before the Bolshevik revolution (some of which I bought at a flea market and now use as wallpaper in the bathroom).
She keeps going with her proposal, but I refuse to further indulge her ramblings here. Realistically, the very premise of Bair's argument is fundamentally flawed.

"Pay for performance has improved management in the private sector," she writes. No, Sheila, it hasn't. Reams and reams of research have been produced which prove your argument wrong. What pay for performance tends to do, instead, is encourage leaders and executives to make company-betting moves which promise huge potential payoffs but equally large risks. If those risks pan out, the executive in question makes millions and retires happy, but if they don't, the whole company blows up and the manager walks away scot-free, moving on to the next gullible company to rinse and repeat (see: John Thain).

These schemes have led to an epidemic of short-termism on Wall Street in particular, where traders and executives have little interest in the firm's profitability beyond the next quarter or year. Making those stocks or options or bonds vest at a later date does little to change the underlying risk/reward dynamic from the standpoint of the executive. While things may be slightly different for Congressmen than for Fortune 500 CEOs, those differences aren't nearly as great as we would like them to be. The folks in Washington have already shown themselves to be experts at trading long-term security for short-term gain, and the last thing they need is another scheme from us that encourages them to do more of the same.

You see, even if our Congressmen (and women) were to blow up the whole country under Bair's proposal, they'd still be pulling in $90k a year (oh, and a housing allowance, of course), well above the national average. That's not exactly giving them the "skin in the game" that they might need in order to ensure that they don't screw things up terribly for the rest of us.

Worse still, the plan suffers from a serious flaw in design by tying compensation to a bond price rather than some other more tangible measure of actual long-term American prosperity. If our Congressmen suddenly own millions of dollars worth of U.S. government debt, then all that does is give them a huge incentive to encourage the clowns over at the Fed to keep on keeping on with their ridiculous quantitative easing, which sends bond prices skyrocketing (and yields plummeting) even while the fiscal state of the union deteriorates by the day.

The real flaw in Bair's argument, ultimately, lies in its presumption that Congressmen and Senators control bond prices and economic outcomes with their policies—they don't. The Fed controls these things, they have for decades, and that won't be changing any time soon, regardless of any "pay for performance" scheme that you want to put into place. Not until the voters force it to be so, that is.

The truth is, the only kind of "pay for performance" scheme that will ever work in a democracy is to vote the bums out when they screw over their constituents. That requires real, actual responsibility on the part of the voters, more than some lazy "autopilot" compensation scheme that won't work and represents a further abdication of the voters' responsibility to hold their elected officials accountable.

Now as ever, we as voters get the government that we deserve. If we refuse to hold our Congressmen accountable with our votes on Election Day, then we can't expect the mess to sort itself out just because they own a few more government bonds then they used to. Bair should know better than this, and yet somehow she doesn't. Unless, of course, this is satire, in which case the joke is, once again, on me.

D.C. politicians have in large part ascended to their lofty positions by being experts at gaming whatever system has been placed before them. Unless a pay-for-performance scheme is meticulously designed to avoid any unintended consequences, you can bet that they'll find the loopholes and design ways to maximize their compensation, regardless of the externalities that may result from their actions. What a joke of an idea. Our politicians need fewer systems and schemes to try to game, not more. Go back to the drawing board, Sheila.


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