Is there a middle path?

That's what I keep wondering - what real impact does a middle path have on the world? does it just postpone the inevitable? does it soothe over the pains of the extreme for a few? Does the middle path actually lead to more optimal solutions in life? does it strengthen or weaken existing orders? And what is really the middle path?

I posit there is no true middle path in reality- because in amiddle path you are just trying to please everybody. You are either center right or center left or generally center off center. But the middle path can be a tactical position - never a strategic one- The strategic position is either offcenter or the extremes. To be in the center means you are likley to be pulled the strongest current eventually and then drowning - unless you have great fortitude and endurance. Stable middle paths exist only in theory. And maybe that's why we keep trying to aim for it.

What were they thinking?

Apologies Jeff Pfeffer. Had to borrow your phrase. But I dont know what else to say about the silliness of today's executives, beginning with the morons at AIG! 167 million dollars in Bonuses - when the comp committee decided to award them, were they on dope or something? Was the CEO on hallucinogenic drugs?

So here's what happened - some really clever product developers at AIG (and at other financial Institutions) developed a bunch of credit derivatives that they didnt know could bring their downfall. These very credit derivatives drove AIG into bankruptcy - none of the other senior executives nor the risk management committee had the technical capability nor the foresight to tackle and prevent this. Despite this management incompetence, the government decided to step in and prop up the company so that millions of ordinary people could be protected and the financial system in the US didnt collapse into the abyss of no return. So what do the AIG executives decide to do? Give themselves "performance" bonuses because otherwise they would "walk away" to other companies! Sounds very dubious indeed!

At the very least they should have thought of the optics of this - company going bankrupt, receives tax payers' money, decides to give performance bonuses to retain key employees, some of whom were probably responsible for this mess. Hmm. Not the kind of behaviour that wins you the fShining Star award.

Here are some other examples "what were they thinking?" recently:
a) The CEOs of the car companies going to Washington in private jets to ask for a bailout
b) The CEO of Ford indicating that he was okay where he was when asked by Congress whether he would take a pay cut to save Ford
c) Citigroup wanting to take possession of a Private jet just after receiving government bailout money
d) The management of Merck supposedly all getting higher than expectation performance bonuses when Merck's performance was reported to have been less than target
e) Merill Lynch staff getting bonuses in millions of dollars just after being saved by Bank of America

The issue with executive compensation

What kind of world do we live in where we value the contribution of a man who risks his life to save the lives of others at a fraction of what we value the man whose life he saves? A battalion chief in NYC makes a total compensation of about 148K per annum. It takes well over 15 years of service to become a battalion chief. A firefighter risks his own life in the course of his duty.

Now compare that to the life of an an investment banker - he starts with a salary higher than that of a battalion chief. He risks nothing but other people's money. And in the process our society is willing to reward this species really handsomely. Is this the meaning of risk reward relationship?

Compensation programs world over have tended to go in the wrong direction - overcompensate some and undercompensate others. Executive compensation has tended to reward folks handsomely more for taking outsized risks with capital and less for showing consistent good judgement and for being an effective leader. Nowhere has this behaviour been exemplified in the worst way possible than in the financial services sector.

Here are the issues with the world of executive compensation

a) Excessive focus on individual performance
b) Excessive focus on short term value creation
c) Poor board oversight on performance and compensation
d) Establishing risk reward relationships that drive poor decision making
e) Inadequate transparency of performance measurement and compensation
f) Very little focus on taking punitive action for poor decision making
g) Increasing complexity of bonus pool calculations and payouts particularly for frontline roles
h) Irresponsible compensation consultants who instead of providing sound advice that can challenge status quo, only pander to the needs of senior executives

One bank that has managed to avoid a large portion of the subprime crisis and resuling mess has been HSBC - why? Among many reasons that include their strategy, geographic presence and good risk management, their rewards structure supposedly does not reward frontline staff so differently from the support staff that frontline staff start behaving irresponsibly. The differential is kept to a manageable minimum and individual stars, while celebrated are quickly cut to size if they become too big.

I must clarify - I am not against paying senior executives well. They should get paid well - but for what ? In my opinion for making tough decisions that have a positive impact on the company's financial and non financial performance on a multi year basis - not just one year. All of these folks make more money than what most people do in multiple live times - and I dont grudge them that - But I do get annoyed when people get compensated handsomely even when they have destroyed other people's wealth just because "the market demands it!"

I support the cap on executive compensation for banks receiving bailout money - none of the CEOs on that list need any personal assistance with mortgages - they havent foreclosed, but their customers did only because the banks sold them loans they couldnt afford! Shouldnt the CEOs and other officers be punished for this irresponsible behaviour?

Its time to pass the bill

The stimulus bill needs to be passed urgently - time to put the politics aside - without the stimulus package the economy is going to sink further. I am never in favour of big government. This spending is not about big government. This is about the government injecting funds into the economy's circulatory system so that people can start borrowing and conducting business. With joblessness increasing the politicians cant afford to dither.