Saturday, February 14, 2009

Congress Reacts by Limiting Board Room Virus Growth

Congress restricted executive pay for financial firms in the stimulus package. The Washington Post reported:

The bill, which President Obama is expected to sign into law next week, limits bonuses for executives at all financial institutions receiving government funds to no more than a third of their annual compensation. The bonuses must be paid in company stock that can be redeemed only when the government investment has been repaid.

Consider Dr. Deming's management theory: By optimizing part of the system, the whole is subopitmized. When CEO's optimize executive incentive compensation, it suboptimizes the company. Employees, shareholders and customers pay the price. Look at executive stock option performance over a decade. Some 30% of executives cheated by backdating options. Only a handful paid a legal price for their sins of stealing millions from shareholders.

With the measure, lawmakers seek to address public outrage over extravagant Wall Street paydays even as taxpayers bail out the industry.

In doing so, Congress shows its ignorance. Elected officials remain firmly wed to the pay for performance tit. The Obama team plans to spread Wall Street's toxic management to education and health care.

Congressional tampering with financial CEO's is akin to restricting the growth of a lethal virus to 20%. Toxicity remains in corporate board rooms and our hallowed halls of government. Obama's non-ideological, practical change is Dr. Deming's "Off to the Milky Way!"

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