Monthly Archives: April 2009

How To Regulate Executive Compensation

The main driver of this economic catastrophe was the behavior of some executives in the banking and financial industry. For this situation to be fixed, we need to alter the behavior of bankers and financiers. Here’s one way of doing it:

1. You regulate the compensation of all +$100,000 earners in any financial institution of certain size. Each institution will be obligated to report electronically and anonymously the pay out for all its +$100,000 earners. This can be done very easily, as they are already doing so, so it is just data mining.

2. You declare that there are no bonuses for anyone in the financial industry from Q3 2009 to Q3 2010.

3. As of Q3 2010, bonuses in the financial industry will be paid only if Quarter On Quarter – QOQ and over the comparable quarter last year (YOY) two indexes grew:

Employment Rate

Inflation-Adjusted Median Wage

It is not that important “how” you measure employment rate and inflation-adjusted median wage, because almost all acceptable methods correlate when it comes to measuring if the index went up or down – they differ only in  absolute numbers. See in the chart below, and the following presentation that shows how wealth creation is distorted and needs to be fixed – by the private sector:   

unemployment_rate_

This is a relatively simple way to alter executives’ compensation in the financial industry, and still continue to promote Capitalism.  Why?

1. Because this way every Banker and Financier will be focusing on POPULAR WEALTH CREATION rather than the wealth creation for the few. Popular wealth creation is different than the DISTRIBUTION of wealth because in popular wealth creation everybody gets more (some get much more, some get “little” more) whereby in distribution of wealth you take from someone and give to someone else.

2. Because this way you take the burden of fixing inequalities from the Government (that  CAN’T fix many things in a timely manner) to the private sector and into the hands of the most financially creative people.

3. Because this way in a recession wealth accumulation amongst the rich is leveled down without forcing wealth distribution (taxes, etc) , and you motivate the financial industry to fix the problems as soon as possible.

4. Because it does not create an regulation monster that consumes resources (the Government agency is auto-triggered-based).

This has to be employed in the western world as a whole, otherwise bankers will migrate from one country to another.

(In the same way, regulate executives’ bonus compensation in the Energy industry and tie it to carbon footprint index – you’ll fix global warming much faster.)

There are plenty of loop holes in this proposal, but granted that the current system isn’t working at all.

Advertisements