I am about 3/4 of the way through Overhaul by Obama appointee and "car czar" Steven Rattner. It's worth reading on a number of levels, talking extensively about the many factors behind the decline of the auto industry, the nightmare of working in Congress, the bigger nightmare of watching everything die in the Senate, and the politics of a hostile anti-regulatory climate. Most interesting, however, is the fact that he pulls no punches regarding how much of the auto industry's trouble was/is of its own making. Free trade and increased competition certainly did a number on the Big Three, but that shouldn't obscure the fact that these companies were run terribly. Like, epic bad. A group of people randomly selected from the phone book could have done as well. Maybe better.
Anyone who follows the domestic auto industry even casually already knows this. To know the name "Rick Wagoner" is to know exactly what kind of ass clowns were making the decisions that drove the world's largest manufacturers into the abyss. Although Rattner does not say it (being a finance / Wall Street guy himself) I think this is a very important point to bear in mind in an economy with such staggering levels of income inequality. Simply put, why do so many of the Upper Management caste make so much money when they are so egregiously terrible at their jobs?
The whole argument behind bloated executive compensation is that companies must pay big in order to attract the very best people. In reality we find that many of them – and Wagoner will be the poster child for years to come – are world class idiots. There is no other way to put it. There is no candy coating on an objective assessment of his performance and that of the other GM/Chrysler top brass. If the one trick they seem to have learned in their expensive educations (cut costs + something something = PROFIT!!!) doesn't work they are dumbstruck. They stand around like deer in headlights until someone fires them. GM paid Wagoner $23 million as a severance package, and yet the guy seemed incapable of grasping concepts that an undergraduate would probably get. He knew less about the auto industry than the average car blogger.
If executives get paid so goddamn much to ensure that only the finest talent fills those important positions, why do the companies large enough to take down our entire economy keep failing so spectacularly? With the exorbitant compensation packages offered to executives at AIG, Bear Stearns, Lehman, GM, every major airline, and dozens of other failed Fortune 500 companies in the past 20 years, why could none of them attract "talent" talented enough to recognize the imminent failure of those billion dollar enterprises?
So much of it boils down to the dominant ethos of the post-New Deal economy in this country – IBG, YBG (I'll be gone, you'll be gone). Individuals in these positions have no long term view of the health of the business, the economy, or anything but their own personal bottom line. Just do whatever enriches us today and don't worry about the consequences. By the time the company is either insolvent or begging for a bailout, I'll be gone and you'll be gone. Honestly, I doubt Rick Wagoner and his nine-figure net worth care much that the economy has gone to shit and his former company is now on life support. He and the many others like him on Wall Street and throughout corporate America are doing just fine right now having been lavishly compensated for "talents" that appear in hindsight to have been limited to lining their own bank accounts and making stupid decisions.
Ike says:
I just want to be head of GM marketing for a week. "It's more car than electric." What the hell does that mean? Meanwhile Nissan is probably going to clean their clock, and all they have to do is say "our car doesn't require gas."
Turkler says:
In answer to your question, "If executives get paid so goddamn much to ensure that only the finest talent fills those important positions, why do the companies large enough to take down our entire economy keep failing so spectacularly?"
I would simply say that the obvious answer is that CEOs stand to benefit from 1) collecting outrageous bonuses and compensation packages based on extremely short-term fraudulent/accounting profits while 2) driving the company directly into the dirt.
William Black has written extensively about the 'criminogenic' environment caused by executive pay programs that enable massive short-term profits in finance. Why not just gut the company? Same thing, one must only assume, for the auto manufacturers. If they are incentivized in such a way that they benefit from 1) cutting costs in the short-term and 2) blowing up the company in the long-term, then they will continue to do so.
Finally, let it be known that there is a further cost with this sort of mentality in industrial production (as opposed to finance) that we saw during the BP spill. That is, a CEO like Tony Hayward *spit* ruthlessly cuts costs to improve the short-term bottom line, then when disaster hits, the government can pick up the cleanup tab. It's sociopathic, but rational. So there is a serious environmental cost to this sort of compensation as well.
So when you write that "Honestly, I doubt Rick Wagoner and his nine-figure net worth care much that the economy has gone to shit and his former company is now on life support," you are totally correct. But they aren't 'stupid' in any normal sense of the term. They are acting quite rationally to gut their own companies for massive bonuses. The only people acting 'stupidly' are the people being hurt by these policies (ALL OF US) that don't take action to limit executive pay and force a more equitable distribution of income.
Or, you know, maybe communism. Maybe.
jazzbumpa says:
I know from living a big chunk of my life in one of those car companies that the management teams were buffoons. This is not hyperbole. This is the literal truth. All you can ever get from anyone in management is regurgitation of the party line. The kool-aid guzzling and ass kissing are something you literally would have to see to believe.
Rick Wagoner is a fucking genius compared to the cretins that Cerberus put in change of Chrysler – led by Bob Nardelli – the man Home Depot gave $212 Million to GO THE HELL AWAY. The car business is different and special, and it takes a car guy to run a car company. So who did they bring in? The ass hole who ruined the hardware store!
Seriously, car companies have always done the best when run by car guys. Frex Iacocca (who is world class prick but a car guy) vs Lynn Townsend – a God-damned bean counter.) In 1997, Chrysler was a great company with exciting product until they got conquered by Mercedes, who literally did not give one shit about the fate of the Chrysler group. The whole fiasco was Juergen Schrempp's ego trip.
Ten years of that, the Cerberus, and Chrysler was little more than a shriveled corpse by the side of the road.
This shit does not happen by accident. There is a rich elite who skim the cream off of everything, and they've been doing it for 30 years. Competence is irrelevant. It's all about who you are.
Welcome to the 13th century. We're all on the road to serfdom.
WASF,
JzB
Mike says:
Wealth is bequeathed. Not earned.
Real wealth. Not the scratch your average 9-5er professional earns.
You want to get rich, go brownnose with a board and get them to hand over the reigns to you. Or go flatter some socialite or learn to suck a mean dick, whatever. Just don't think you're getting wealthy on "talent" anytime soon.
HoosierPoli says:
If any GM or Chrysler or Ford executive had approached one random person on the street at any point in the last 30 years and asked them, "What can we do to become more competitive in the market?" they would have gotten a simple, four-word answer that would have saved their company: "Stop making shitty cars". Lo and behold, apparently Ford has stopped making shitty cars, and incredibly are starting to sell them again.
jazzbumpa says:
If they are incentivized in such a way that they benefit from 1) cutting costs in the short-term
Yes, they are.
John says:
Consider the entire *concept* of a severance package.
If you or I fuck up at our jobs, our 'severance package' is a pink slip. When Rick Wagoner fucked up at his job, he got millions of dollars as a going away present.
This is all you need to know about how the top margin of the country functions. Even when they fail miserably, they still get paid more money than the average American can even fathom by others like them in a wink-nudge movement. A CEO comes in, gets his contract, then slashes thousands of working-class employees out of their jobs. His reward? A bonus package worth more than the entire combined compensation of those thousands of employees and then some.
When Wagoner failed, he was paid $23 million for his troubles. Using that same money, they could have employed 460 $50 thousand per year employees for a year.
Ben says:
Another factor in the de-coupling of CEO wages from actual performance is our old friend the principal-agent problem.
If an agent can be effectively monitored by a principal, then there are few costs to having an agent do a job instead of a principal. If an agent cannot be effectively monitored, there are often costs involved in having the agent do that job (a concept called "agency costs").
CEOs are agents who face exceptionally weak principal oversight. The shareholders are their ultimate bosses, and any individual shareholder faces tremendous incentive to not research their CEO themselves and rely on someone else to do the work for them. Hence very few shareholders actually research the job their CEO is doing.
Another factor in weak CEO executive oversight is the nature of shareholder-elected boards which may nominally oversee them. Board oversight is usually weak because there is little incentive for board members to actually monitor the CEO; no-one is monitoring them, after all, and their election to the board is often secure whether they effectively monitor the CEO or not. Another factor for weak board oversight is that it is often stocked by potential CEOs, so that a culture of weak oversight is very much in the interests of board members.
Faced with such ineffective oversight, it's no wonder that the principal (shareholders) has to pay outlandish costs (compensation) in order to keep their agents (CEOs), even if Troy Polamalu's jockstrap could do a better job than any individual CEO.
Duncan says:
Did you read this?
Malcolm Gladwell has a
Duncan says:
Malcolm Gladwell has a “must read” piece in the New Yorker. He reviews Steve Rattner’s “Overhual” but doesn’t stop there. He also assesses the auto bailouts and offers great commentary on the world of private equity.
Gladwell’s skewers Rattner’s superficial assessment of Rick Wagoner. His points about a similarly superficial (but opposite) assessment of Rick’s replacement, Ed Whitacre are spot on.
http://www.newyorker.com/arts/critics/books/2010/11/01/101101crbo_books_gladwell?currentPage=all
Wisakedjak says:
Really?
to quote Gladwell (damn pseudo-scientific pop journalist)
"But, especially given the mess that Wagoner inherited when he took over, in 2000
Nunya says:
This is what happens to all companies when the employee base has absolutely no part in the decision making process. It's easy to point to the Big Three but the same ethos exists in every Fortune 500 company. Management exists solely to act as princes of their own little feifdoms. Leadership and vision take a distant back seat to playing politics.
Europe, and German in particular have "workers councils" that are required to be present at every board meeting and to have a certain amount of time to adress the members as well as a vote. The result BMW vs. Chevy and Mercedes versus Ford.
Ignoring the people in the trenches destroys the competitiveness so often described in the media. If you wonder why Microsoft is always a day late and a dollar short, it only takes a few weeks working there to realize that innovation has taken a back seat to management self love.
Ironically, the thing that has most damaged the innovation of large companies in America is that they have ignored the excellent advice that can only come from those on the front line. Hiring more and more over-credentialed sociopaths with absolutely no oversight leads companies to where they are today.
Not to oversell the point but, there is the fnudamental question of whether or not truly monolithic companies do anything to serve the public interest. As we watch the neverending spiral to the bottom in every indistry from airlines to software to manufacturing of all types, I think the conclusion is obvious.
We need Teddy Roosevelt back in office.
Southern Beale says:
In reality we find that many of them – and Wagoner will be the poster child for years to come – are world class idiots.
Yes and it goes way, way back. Remember the Treaty of Detroit? This is why we have the crappy private insurance model of healthcare so entrenched in our system. Or one of the big reasons, at least.
anotherbozo says:
Coincidentally I've been reading a book on probability and randomness, "The Drunkard's Walk" by Leonard Mlodinow. In Chapter 9 he points out that stock market "experts'" predictions often fall BELOW random patterns of success, and that money managers supposed "winning streaks" are answerable to the same laws. (It explains my own disastrous portfolio, not to mention Jim Cramer's hot picks) Yet financial managers equal or top CEOs for obscene compensation.
A worthy, but depressing, read, unassailably documented.
Misterben says:
I would argue that this is one aspect of the crisis of leadership being suffered by this country, and to a larger extent most of Western Civ.
I absolutely blame America's CEOs and their underlings for being idiots and/or sociopaths. They should have tried, and should still be trying, to be better and more responsible people, to be better at their jobs, and if they found themselves incapable they should have admitted it and bowed out.
But I think ultimate blame lies with the elite of the elite: the ultra-rich who constitute the members of America's various Boards of Directors. After all, they are the ones who actually hire the CEOs and create or sustain the cultures of indulgence, arrogance, and entitlement that support them. They are the ones who approve the decisions, who push for things like outsourcing and downsizing, who relentlessly place short-term shareholder benefit over the long-term well-being of the company or the community that hosts it.
Membership in the elite of a society ought to mean that you bear the terrible responsibility of Leadership: the responsibility to make very difficult decisions that require bravery and self-sacrifice, the denial of your own immediate pleasure so that the society itself may benefit. What once made this country great was our very strong, very clear social contract, which offered our elites almost unlimited potential for success, but bound them with the requirement to take leadership seriously. We expected our elites to build public libraries, schools, parks, opera houses, etc., we expected them to keep employing people here, and we expected them to do things like re-tool their factories for wartime production when necessary.
America's elite have decided to exempt themselves from the old social contract: they want all of the benefits, with none of the effort. They no longer demonstrate any concern for the country's long-term well-being, or even for its present prosperity; their only concern is enriching themselves and people like them.
We have allowed our elites to form themselves into an aristocracy. What's more, they have become a greedy and contemptuous aristocracy that cares nothing for the society it rules. I would argue that it is in such times, with such shabby, shameful leadership, that a society can fall apart.
Xynzee says:
@Duncan: thanks for the link.
However anyone notice the praise upon which he piles upon Wagoner for doing the rank n file slash n burn?? Hey I've F—ed over the workers and cut their entitlements, now look at the profits!!
So when he says paying for the retirement benefits for 500k exemployees ie health care is something that German and Japanese competitors aren't saddled with, I'd like to ask just why is that? Hmmm… could it be those countries offer national health care? Just askin.
shouldbegradingpapers says:
Private industry isn't the only place where douchecanoes are hired at exhorbitant salaries and exhibit less common sense than Homer Simpson after a 12-pack of Duff. Welcome to the world of education where the top dawgs receive ridiculous pay packages and signing bonuses and parachutes. Recently, one of my neighboring metro Atlanta counties gave the interim superintendent a $73,000 raise; they are cutting teachers and schools and support, but she "deserves to be paid for the job she is doing." The last jackwad left because he was being indicted for fraud within the system, but they still paid him $85,000 to go away. WTF? But none of us will live to see salary caps or practical nationalized health coverage. Jesus wept.
And I don't even believe in Jesus…
Tim H. says:
Some thirty years ago, I read that some engineers at Chevrolet were thinking about the chevette and the parts bin, and thought a hot rod version would be entertaining and profitable. They put a V6, some wide tires and better shocks on it and presented it to management, who rejected it, but not before they got the engineers to put an automatic in it, because they couldn't drive a stick shift. Yeah, some kind of car guys there.
Da Moose says:
This story is simply indicative of one aspect of the collective cultural poisonous murk we now find ourselves in. Their level of compensation is what contributes to their inability to manage because it creates a social caste climate that says that actual work is beneath those who make this type of money. Let's also not forget that our culture has become so incredible passive aggressive in nature that executives at the highest levels would rather put off all decisions so that they don't run the risk of potentially making a poor decision that puts them in a reputational bind later on. It is much easier to collect the big check while watching first hand the organization sink into the ocean. At the end of the day, you can always blame someone else. The average American is too stupid or too weak to challenge you. Welcome to America!
Seth says:
Shouldbegradingpapers gets it just right.
I teach in the state-owned university system in PA. Just a couple of months ago, our system management announced pay raises for almost all the university presidents this year. Among the highest raises were those going to the presidents of universities that are retrenching faculty on the grounds that they can't afford us.
So it's clear that money exists, and they can spend it where they want. It's less clear, but still feasible, to believe that our system is actually rewarding presidents who lay off tenured faculty to save money.
That's destined to work out well.
Kulkuri says:
"The Peter Principle" needs to be revisited and revised. Today's top management has risen way above their level of incompetence.
Even back in the days of "Robber Barons" some of them believed in the philosophy of "To those that much is given, much is expected". That is why they built libraries and started foundations to benefit people. Also things like when Henry Ford raised wages for his workers because he knew if the workers couldn't buy the cars they were building, who would?? Kellog had 6 hour shifts so the workers could spend more time with their families.
Ever since St. Ronnie of Reagan not only made greed acceptable but desirable and something to strive for, the philosophy has been "I got mine, FUCK EVERYBODY ELSE"!!! This seems to be deeply ingrained in everyone that wants to work in management.
Now if instead of CEOs getting a golden parachute to leave, they were made to give back a large part of their salary and/or bonuses for driving the company in the ground, then maybe we would see a change in how they operate. It's a little thing called "Accountability".
anotherbozo says:
@Kulkuri: slogan now is "I got mine, but I want yours too."
peon says:
Look no further than the current celebration of the Feast of St Ronnie for the answer. This is an example of the Reagan ethos: "At his Hollywood height, actor Ronnie Reagan was making $400,000 per picture. With the top federal tax rate over 90 percent, Reagan used to tell his White House chief of staff Donald Regan, he always chose to
Hawes says:
Check out the video here:
http://zombieland-nowbrainfree.blogspot.com/2011/02/putting-lie-to-ceo-economics.html
It's from the RSA and it shows how the very idea of incentivized pay for creative thinking actually backfires and creates worse results. Really interesting behavioral economics.
keith says:
The boards of these companies are every bit as self-deluded and/or incompetent as the CEOs they hire. One would think they could import cheaper executives from oversees and get a much better business outcome.
There are too few visionaries left, or when visionaries come along, they lie outside the boundary of consideration for corporate America. For GM, why aren't they out front promoting new rail infrastructure with the same vigor they once promoted road (in lieu of rail) infrastructure? The company would benefit to the degree that they helped to rebuild needed infrastructure, and could sell lots of trains and train parts. Are cars really the only motorized vehicles they can make? Why aren't they pushing for serious health care reform like Medicare for everyone? This would improve their strategic position. A lack of vision mixed with greed and incompetence, and the result is rather predictable.
bob_is_boring says:
Ed,
I think either "ass-clowns" (hpyhen) or "assclowns" (no space) would be better usage, but I'd love to hear an argument for the two-word compound version.
Anyway.
Paul W. Luscher says:
I think one answer to your question is that the talents REALLY required to become a CEO these days are what I call "John Boehner talents": Ass-kidding, schmoozing, being one of the boys, and a good game of golf.
wenchacha says:
Many thanks to you and all commenters for refraining from blaming the auto workers and unions! There is indeed blame to spread around, but as a GM spouse, it has been infuriating to hear every blowtard yap on and on about how unions wrecked the auto industry.
GM management (!) was as hide-bound as it could be. It never paid off to innovate, God forbid something go wrong. Anyone associated with a new idea that failed to succeed beyond all reasonable expectation would be forever marked as a loser or not being a team player.
Union workers with degrees and experience would never be considered for any management position other than being the immediate supervisor of former fellow union workers. This job guaranteed they were forever in a squeeze between the rock and a hard place.
Since we now depend on the future success of GM in order for my spouse to receive the pension he was promised over years of negotiation, I sincerely hope the Volt is wildly popular. Reviews have generally been good. The gas tank should assure buyers that they will not find themselves stuck without a charge nearby.
CEOs and board members who destroy organizations and then reap golden parachutes ought to be held in scorn by all. It would be a little easier if they were as omnipresent as celebrities. Most of them live their lives in gated isolated splendor, far from most working stiffs they have screwed.
SeaTea says:
I'm with Keith. I see all these ways that people could MAKE A FUCKING FORTUNE doing the RIGHT thing, but they cling to making their money doing the wrong thing in industries that are dead-ends (e.g. oil, coal, etc.) and need to resort to more and more amoral measures to keep the money rolling in.
displaced Capitalist says:
The problem is the main problem with capitalism as I see it. You don't need to make a quality product to make a lot of money. I work in a field where there are a lot of shoddy knock-offs that are made, and needless to say, they make lots of money doing it because they have good marketing. The customer wants to feel good about buying the product, not about owning the product, so in the end all my effort is for naught.
Monkey Business says:
Here's the problem at these companies: top level employee compensation is almost always tied to stock price.
So, here's the solution. If you're the CEO of a publicly traded company, your salary will be $1. Your entire salary and bonus will be paid entirely in stock. The majority will be held in escrow as a hedge against short term gains at the expense of long term performance.
DS says:
I agree with everything you said, but I think its also important to remember that GM, Ford and Chrysler were responding to customer demand for the types of cars they made. People didn't want small, full-efficient, "European" (spit) cars until a very short time ago; they wanted SUVs, gigantic sedans, mini vans, mega trucks that had lots of bells and whistles but were incredibly inefficient and poorly made. The problem is that when the demand for those types of vehicles started to collapse a number of years ago they were unable to effectively adjust, and their market share collapsed as people became more urban and wanted smaller, more efficient vehicles. So while the "Big Three" deserve their fate in a lot of respects, I think its important to remember that the schizophrenic nature of the Boomers and the people just behind them bear a lot of responsibility as well.
Tim H. says:
Detroit has had other disincentives to innovate, if they wanted to build something really interesting, they couldn't show it off at nascar races where they wanted traditional technology. Ralph Nader slammed GM for the corvair's swing axles, but was quiet about similar suspensions on Mercedes and VW. And if they tried to build something fun, the insurance folks were always there, "Sporty? Kaching!".
Townsend Harris says:
@ DS wrote "the schizophrenic nature of the Boomers"
Yer darn tootin', DS. In the 1980s, at the prompting of Boomers, the EPA reduced industrial smokestack pollution across the upper midwest and northeast. At the same time, pollution increased when Boomers began driving the less-regulated trucks called SUVs.
LucyTooners says:
The reality is that incompetence, greed and no talent is what heads up most of corporate America. I have personally worked in several companies that the top management are nothing more than ladder climbers that care nothing about working, doing a good job or contributing to the success of the company. All they care about is the prestige and money. They will step on anyone that gets in the way. These people are not the talent they are empty suits and when they get discovered they have already done damage to the company. Most of the talent gets overlooked for positions of importance instead they are ridiculed and exploited. There is not wonder that American companies are behind the curve when it comes to innovation and competitiveness. They have been raped and left empty. Enron anyone?
Rick Massimo says:
"If the one trick they seem to have learned in their expensive educations (cut costs + something something = PROFIT!!!) doesn't work they are dumbstruck. They stand around like deer in headlights until someone fires them."
When economic times are good, you can have any jackass at the top of these companies and they'll make money; when times are bad, any jackass can sit behind their desk and say "Fire a bunch of people" – half of them don't even take it upon themselves to figure out whom to fire.
That's not talent. Show me a CEO whose company can MAKE money while other companies are losing it – that guy has talent, and that guy deserves to make a lot. Picking up your company's earnings statement and saying "I'm gonna go play golf" (if it's printed in black ink) or "Fire some people" (if it's printed in red) is NOT talent.
electricgrendel says:
I am a nursing student. I had to take a year of pre-reqs, and since I'm getting an associates I have to pass two years of nursing courses and about 500 hours of clinicals satisfactorily. Then I have to pass the NCLEX, meet a whole bunch of professional standards and pay to get licensed. Once licensed I actually have to find a job, go through a period in which specially trained nurses watch me like a hawk and guide me. Then I get to go on the floor by myself. All told, this process will be along the lines of four to four and a half years before I start being a nurse. Now- I fully understand why this process is so long, and I think it is greatly necessary. Bad nurses kill people.
To be a CEO there is no licensing requirement. There's really no education requirement. Most CEO's of powerful corporations do in fact have a great deal of education, but there's no accrediting body making sure that people who steer the ships of industry know what the hell they're doing and pay a professional price when they prove they do not. The worst that happens is that they get an eight figure severance package so that the company can move on.
Yet- most of these companies in some way benefit from corporate welfare. They get scads of tax breaks, yet never have to prove that they are choosing CEO's that meet a certain level of knowledge and competence. I know it may sound stupid, or radical, but really what other profession which has such a grave impact on the public lacks a licensing process? Nurses, doctors, lawyers, architects, engineers all have to face licensing requirements just to do their jobs. And these licenses are enforced by professional bodies who receive their power from the state.
Why are CEO's any different? Why do we continue to shovel government money in the form of corporate welfare to businesses that refuse to certify their selection of CEO as qualified by an objective body? It's madness, and it's what keeps unqualified CEO's moving from disaster to disaster while unqualified nurses are barred from their profession. And who is really more dangerous to the public at large: Richard Wagoner or a sloppy, dangerous nurse?