The recent brouhaha over Bank of America’s denial of a line of credit is a precursor of things to come. Late last year B of A, refused to extend a line of credit to the Republic Windows and Doors company of Chicago. Immediately there were howls of protests. Now disgraced Illinois governor Rod Blagojevich threatened to suspend all state business with the bank. Jesse Jackson – as usual – showed up protesting and passing out turkeys to workers who had started a sit in at the factory because they had been laid off without adequate notice as required under the law. Jackson stated that “This is the beginning of a larger movement for mass action to resist economic violence.”Even more ominously Barack Obama voiced support of the workers saying that their actions were justified in demanding their benefits and pay.
So what was all the fuss about? B of A had received $25 billion in federal bailout money which in the minds of Blagojevich, Jackson, Obama and the workers meant that it was obligated to support the company. Never mind that B of A said that the company was not viable. Never mind that this was a bad loan. Never mind that the company apparently could not tap other sources of funds. B ob A was obligated to make the bad loan because it itself was bailed out.
What was interesting is that the B of A and not the company was the object of the protestors. The company said that it could not pay the workers the benefits and pay required by the law because it was out of money. It asked B of A to extend the credit line which Bo A rightly refused to do. So in essence, the company cannot pay back its debt to the bank and the bank is vilified for not making a bad loan.
Bank of America issued the following statement “As a creditor of the company, we continue to honor all of our agreements with the company and have provided the maximum amount of funding we can under the terms of our agreement. By any objective measure, Republic Windows and Doors is unable to operate profitably given the challenges of the current economic climate and its industry. Public statements by management of the company have made this clear. When a company faces such a dire situation, its lender is not empowered to direct the company's management how to manage its affairs and what obligations should be paid. Such decisions belong to the management and owners of the company. Bank of America has worked with the company and shared our concerns about the company's situation and its operations for the past several months. It is unfortunate that the company has been unable to reverse its declining circumstances.”
Well B of A blinked. One week later it announced that it would extend loans to the company to settle the employee claims.It also announced that the loan would not be large enough to reopen the factory. In other words, the bank just knowingly threw money away. Stockholders should rise up and protest. Executives should be fired. But this is simply a precursor of things to come. If you accept the government’s money you are subject to this type of nonsense. Get used to protests, cave-ins, and ultimately the government telling the banks to make bad loans. I know some will say that “weren’t bad loans what got us into this mess in the first place?” The answer is yes and no. Yes the loans were bad ex post. Those loans when granted were good loans. Its hard to make a bad loan in a market that is appreciating by 20 percent per year. The difference is that now the banks will be forced to make loans that are bad when they are made.
Don't get me wrong. I have little sympathy for the bank for taking the government's money in the first place. I have less sympathy for them now. However, this is a warning shot across the bow of all the banks.
Lets have some fun. Obama has named his cabinet so I decided to announce mine. Mine is diverse and probably unique since all those named have some expertise in their fields. John Bolton would be great at State as would Sarah Palin at Interior and Schwartzkopt at Defense. My Tennessee bias shows with the selections of Bill Frist at Health, Bob Corker at Commerce and Marsha Blackburn at Transportation. Since Bob Mueller heads the FBI, he should be a natural at Homeland Security. Sanford Bishop has experience on various agricultural committees and I have always admired his level headedness. Miguel Estrada should be on the Supreme Court so Justice would be a great consolation prize. Steve Forbes at Treasury despite his support of the Bush bailout. Tom Sowell is my only living hero so he has to go somewhere. Bob Woodson would reshape HUD as would Michelle Rhee (who is doing a wonderful job transforming the DC schools) at Education. Castro-Wright is CEO of WalMart so he's my pick for Labor. Boone Pickens at Energy would push for all energy sources not just the trendy ones that are so expensive. Ann Dunwoody is the first four star woman general. Enough said.
All the auto executives should be fired by their boards of directors. Given the opportunity to present their case to the American people why their companies are failing, they instead were seen begging before the Congress. It is ironic that the day of their begging for a handout, Honda was opening a new assembly plant in Indiana. Somehow this was lost on the auto executives, the Congress, the press and the American people. Why is it that the foreign auto makers suffer less losses in the United States and the US automakers make money abroad? Instead of addressing these fundamental issues, the automakers just pleaded for more cash. Does anyone really think that this infusion will be anything other than a temporary patch and then they will come back for more? The Congress looking down their noses pontificated that Detroit would get the money if they made hybrids and electric cars - cars that few of us want to own. Hybrids are expensive and make no economic sense for those of us who aren't on a guilt trip about global warming (actually global cooling). Electrics have virtually no range and the batteries are expensive to replace and will constitute a landfill nightmare. Surely, the manufacture of these turkeys will not put the American auto industry back in the black. Congress has an agenda to get the automobile off of fossil fuels and onto more expensive alternatives - the public be damned. Instead of the auto execs forcefully making their point to save their companies by getting the regulations imposed by Congress off their backs, reducing their labor and benefit packages aggressively by seeking significant concessions from the unions and aggressively restructuring their industry, instead they were just a bunch of toothless eunuchs. They have failed their stockholders and their customers. If any company takes a penny of federal money, I suggest that all their executives get paid at the federal pay scale for the senior executive service for they will now be minions of the state.
In the Knoxville News-Sentinel on December 2, 2007 I had the temerity to question global warming (that article is posted below as an "older post"). It evoked a firestorm of criticism. The one that I remember best said that I might be right but the world could not take the chance that I was wrong. My sin? I simply questioned the global warming models. Indeed, one climate scientist remarked that it was as likely to have global cooling or no climate change as was likely to have global warming. As one who makes his living constructing and testing models, a model that yields equally conflicting results is of no value at all. What I learned from my heresy was that no evidence can change the minds of the proponents of global warming. It has become like a religion and is now an article of faith rather than fact. What is interesting that when I started thinking about global warming I had a completely open mind - although I was naturally suspicious about any issue backed by Al Gore. As my students know, my philosophy is "if you prove me wrong, I will adopt your position." Well my readings have led me to the position that global warming is a hoax. Isn't it interesting that the same alarmists who twenty years ago were warning about global cooling are now warning about global warming? As one of my students remarked, given the recent evidence which some go so far as saying have invalidated global warming to where no self respecting scientist would now embrace it, it is now fashionable to now warn against climate change. So now comes the report that 2008 was the coldest year in the past decade. Of course, the global warming crowd will say that although 2008 was cold, it would have still been warm to Dickens (presuming that Dickens could be still around at a robust age of 196 - see http://www.guardian.co.uk/environment/2008/dec/05/climate-change-weather). However, for the rest of us was the following article in the Boston Globe (how apt) by Jeff Jacoby.
JEFF JACOBY
Br-r-r! Where did global warming go?
Email|Print|Single Page| Text size –+By Jeff JacobyGlobe Columnist / January 6, 2008
THE STARK headline appeared just over a year ago. "2007 to be 'warmest on record,' " BBC News reported on Jan. 4, 2007. Citing experts in the British government's Meteorological Office, the story announced that "the world is likely to experience the warmest year on record in 2007," surpassing the all-time high reached in 1998.
But a funny thing happened on the way to the planetary hot flash: Much of the planet grew bitterly cold.
In South America, for example, the start of winter last year was one of the coldest ever observed. According to Eugenio Hackbart, chief meteorologist of the MetSul Weather Center in Brazil, "a brutal cold wave brought record low temperatures, widespread frost, snow, and major energy disruption." In Buenos Aires, it snowed for the first time in 89 years, while in Peru the cold was so intense that hundreds of people died and the government declared a state of emergency in 14 of the country's 24 provinces. In August, Chile's agriculture minister lamented "the toughest winter we have seen in the past 50 years," which caused losses of at least $200 million in destroyed crops and livestock.
Latin Americans weren't the only ones shivering.
University of Oklahoma geophysicist David Deming, a specialist in temperature and heat flow, notes in the Washington Times that "unexpected bitter cold swept the entire Southern Hemisphere in 2007." Johannesburg experienced its first significant snowfall in a quarter-century. Australia had its coldest ever June. New Zealand's vineyards lost much of their 2007 harvest when spring temperaturesdropped to record lows.
Now all of these may be short-lived weather anomalies, mere blips in the path of the global climatic warming that Al Gore and a host of alarmists proclaim the deadliest threat we face. But what if the frigid conditions that have caused so much distress in recent months signal an impending era of global cooling?
"Stock up on fur coats and felt boots!" advises Oleg Sorokhtin, a fellow of the Russian Academy of Natural Sciences and senior scientist at Moscow's Shirshov Institute of Oceanography. "The latest data . . . say that earth has passed the peak of its warmer period, and a fairly cold spell will set in quite soon, by 2012."
Sorokhtin dismisses the conventional global warming theory that greenhouse gases, especially human-emitted carbon dioxide, is causing the earth to grow hotter. Like a number of other scientists, he points to solar activity - sunspots and solar flares, which wax and wane over time - as having the greatest effect on climate.
"Carbon dioxide is not to blame for global climate change," Sorokhtin writes in an essay for Novosti. "Solar activity is many times more powerful than the energy produced by the whole of humankind." In a recent paper for the Danish National Space Center, physicists Henrik Svensmark and Eigil Friis-Christensen concur: "The sun . . . appears to be the main forcing agent in global climate change," they write.
Given the number of worldwide cold events, it is no surprise that 2007 didn't turn out to be the warmest ever. In fact, 2007's global temperature was essentially the same as that in 2006 - and 2005, and 2004, and every year back to 2001. The record set in 1998 has not been surpassed. For nearly a decade now, there has been no global warming. Even though atmospheric carbon dioxide continues to accumulate - it's up about 4 percent since 1998 - the global mean temperature has remained flat. That raises some obvious questions about the theory that CO2 is the cause of climate change.
Yet so relentlessly has the alarmist scenario been hyped, and so disdainfully have dissenting views been dismissed, that millions of people assume Gore must be right when he insists: "The debate in the scientific community is over."
But it isn't. Just last month, more than 100 scientists signed a strongly worded open letter pointing out that climate change is a well-known natural phenomenon, and that adapting to it is far more sensible than attempting to prevent it. Because slashing carbon dioxide emissions means retarding economic development, they warned, "the current UN approach of CO2 reduction is likely to increase human suffering from future climate change rather than to decrease it."
Climate science isn't a religion, and those who dispute its leading theory are not heretics. Much remains to be learned about how and why climate changes, and there is neither virtue nor wisdom in an emotional rush to counter global warming - especially if what's coming is a global Big Chill.
I really hate to say "I told you so" but I told you so. My March 2008 article in the Knoxville News-Sentinel stated that the then proposed economic stimulus package proposed by President Bush would have little impact on the economy. True to their type, the politicians led by President-elect Obama are pushing for a new economic stimulus package. Again, it will do little good but at least it gives the impression that the politicians are doing something. However, it will do harm in that it adds to the already oppressive burden of growing Federal debt. But more on that later. For now, here is the News-Sentinel piece from March 3, 2008.
The economic stimulus package has been enacted adding further evidence that our national politicians have crossed over to the dark side. The package is supposed to keep the country out of a recession. The question is will it work? The answer is no. First and foremost, no package of transitory and temporary measures has ever been effective in stimulating economic growth. Even the politicians know this. Historically the only stimulus measures that have had a lasting impact have been those that are more permanent such as decreasing marginal tax rates and cutting the corporate income tax. Recent research shows that if the Bush tax cuts were made permanent, $76 billion would be added to GDP creating 709,000 jobs. That these measures were not considered shows that Congress wants a thankful electorate with their hands out rather than seriously addressing our economic ills.
It is interesting that our Tennessee politicians in Washington covered the spectrum of choices. One of our senators embraced the package and the expansion by the senate to include seniors on social security and disabled veterans while the other rightly referred to it as a political not economic stimulus package. One of our representatives walked deftly down the middle of the road, voting for the package and then co-sponsoring a bill to reduce the corporate tax rate by 10 percent.
Yet make no mistake about it, this bill would have never been enacted if this were not an election year. First, the size of the package is $168 billion which amounts to about 1 ½ percent of GDP. I have yet to hear how such a small injection is enough to keep the economy out of a recession. Second, a large part of the package is in the form of checks sent to households earning less than $150,000. Research on the impact of a similar tax rebate as part of the 2001 stimulus package shows that the rebates were mostly saved or used to reduce debt burdens rather than spent. Given the impact on consumer’s balance sheets of the recent fall in home values and increasing debt burdens, consumers are not likely to use the money to increase spending. Third, the 2001 stimulus package was enacted with the government running a budgetary surplus. That is not the case today.
Therefore, one thing is certain, there will be a negative long term impact – an further increase in the deficit. This is because the government can raise the money for the package by either borrowing it, increasing taxes or by printing it. All are bad. As pointed out by our senator Bob Corker, it will all be borrowed with a cumulative effect of growing the deficit by over $700 billion in two generations. In effect, our grandchildren will pay for the folly of this Congress.
(Let me say at the outset I am truly sorry for those who have lost their jobs or are facing the possibility of a job loss, whether at GM or any other firm. I have been there, as have most people at one time or another.)
I wrote in 2004 that GM was essentially bankrupt. They owed more in pension obligations than it seemed likely they would be able to pay, without major restructuring of the union contracts. I was not alone in such an assessment, although there were not many of us. Now that assessment is common wisdom.
Bloomberg today cites sources that claim a collapse of GM would cost taxpayers $200 billion if the company were forced to liquidate. The projections also called for the loss of "millions" of auto-related jobs. GM, Ford, and Chrysler employ 240,000. They provide healthcare to 2 million, pension benefits to 775,000. Another 5 million jobs are directly related to the three auto companies. GM has 6,000 dealerships which employ 344,000 people. According to a recent study by the Center for Automotive Research (CAR), if the domestic automakers cut output and employment by 50 percent, nearly 2.5 million jobs would be lost and governments would lose $108 billion in revenue over three years. (Edd Snyder at Roadtrip blog)
How did we get to a place where the market cap of GM is a mere $1.8 billion and its stock price has dropped from $87 in early 1999 to $3.10 today? (See chart below.) Where Rod Lache of Deutsche Bank has a "price target" of zero for GM? "Even if GM succeeds in averting a bankruptcy, we believe that the company's future path is likely to be bankruptcy-like," Lache wrote.
The litany of reasons is long. At the top of the list are union contracts which mandate high costs and pension plans which cannot be met. Then there is the problem of many years of poorly designed cars, although they are now getting their act together. We can also discuss poor management and bloated costs, like paying multiple thousands of workers who are not actually working. GM is structured for the 50% market share they used to command, whereas now they only have 20%.
Wilbur Ross, a well-known multi-billionaire investor, was on CNBC saying that allowing GM to go bankrupt would throw the country into what sounded like a depression. Of course, he does have an auto parts company which supplies GM; so he, as my Dad would say, does have a dog in that hunt.
Ross said that we as a nation are to blame for GM's problems (I am not making this up) because we do not have a national industrial policy. The US allowed other automotive companies to build plants in states that had lower labor costs, and that is the reason GM is uncompetitive. GM pays an average of $33 an hour, and those selfish other companies pay a mere $19 plus a host of benefits.
Ross evidently believes that because some states have lower taxes and right to work laws, that it is the responsibility of the taxpayer to give GM a certain type of immortality rather than suggest GM deal with its problems directly. I assume that Ross also sides with the French when they suggest that Ireland should raise taxes so they will not have to compete with Ireland for business. Such thinking is nonsense and is also unconstitutional.
Let's all acknowledge that having GM go bankrupt would not be a good thing. But it is not the end of the US automotive industry, nor even of GM. Let's think about what a GM bankruptcy might look like. In a bankruptcy, the debt holders line up to come up with a restructuring plan so that they can maximize the return of their loans or obligations. The shareholders get wiped out, but with GM down over 95%, that has largely been accomplished. That process has happened with airlines, steel companies, and tens of thousand of other companies. It is called creative destruction.
First, let's understand that the real owners of GM are the pension plans, as I wrote in 2004. They are the entities with the largest obligations and the most to lose. They are the biggest stakeholders in a successful GM. Giving them the responsibility for making a new, leaner, meaner GM with realistic union contracts would be rational; otherwise they would lose most of what they have.
Factories need to be closed. Auto sales are down to 11 million cars a year, the lowest since 1982, which was the last major recession. Automotive companies sold cars at such low prices in the last few years that sales went to 16 million a year. But the cars that have been sold will last for a long time. Few people are going to buy a new car when the old one is working fine, especially in a recession and a Muddle Through economy. Further, does GM really need eight automotive lines, some of which have been losing money for years?
A restructured GM with realistic costs could be quite competitive. They have some great cars. I drive one. It is four years old and so good I am likely to drive it for at least another four.
At some point after the restructuring, the pension plans could float the stock on the market and get some real value. If actual pensions need to be adjusted, then so be it. While that is sad for the GM pensioners, is it any sadder than for Delta or United Airlines or steel company pensioners who saw their benefits go down? For the vast majority of Americans, no one guarantees their full retirement. Why should auto trade unions be any different?
Taxpayers in one form or another are going to have to pay something. Unemployment costs, increased contributions to the Pension Benefit Guarantee Corporation, job training, relocation, and other costs will be borne. So, it is in our interest to get involved so as to minimize our costs, as well as help preserve as many jobs as possible.
Sadly, I think it is likely that a Democratic majority next year will quickly pass a bailout that will not solve any of the longer-term problems. Obama evidently wants to appoint an "automotive czar;" and the name being floated is the very liberal Michigan former Representative David Bonior, whose anti-trade and pro-union positions are well known. This is appointing the fox to guard the hen house. It is not a recipe for the restructuring that is needed.
The bailout for GM is a bailout for the trade unions and management (who not coincidentally both made large contributions to the Democratic Party and candidates). US consumers are simply going to buy fewer cars in the future. That is a fact. Spending $50 billion does not address that reality. That $50 billion can be better spent by helping workers who lose their jobs. Without serious reforms a bailout will simply postpone the problem, and there will be a need for more money in a few years. And do we think that the management which got GM into the current mess is the group to bring them out?
And as to the argument that "We bailed out Wall Street, so why not GM?" it doesn't hold water. What we did and are doing is to try and keep the financial system functioning, so we don't see the world economy simply shut down. But don't tell the 125,000 people who have lost jobs on Wall Street that it was a bailout. That number is likely to go to 200,000. No one thinks that a restructured GM would see anywhere close to half that number of job losses.
Do we protect Circuit City? Sun just announced plans to lay off 6,000 workers. Where is their bailout? Citibank announced 10,000 further job cuts today. This is a recession. And sadly that means a lot of jobs are going to be lost. GM workers should have no more right to their jobs than a Sun or Citibank or Circuit City worker.
Now, would I be opposed to a bridge loan to help in the transition? No, because a viable Detroit is good for the country and will cost the taxpayer less in the long run than if we have to pick up their pension benefits. But any money must come with realistic reforms that put in charge new management and a realistic cost structure so GM can comp
This article originally appeared in the Knoxville News-Sentinel on Sunday, November 2, 2008
Having had to manage the federal agency overseeing credit unions during the last period of financial stress for depository institutions, I have an appreciation for the pressures faced by today's federal regulators. Nevertheless, I am struck by the differences in approaches.
At the National Credit Union Administration, we aggressively deregulated to make credit unions more flexible and better able to handle financial crises. The opposite is occurring today. Instead, the government's reaction has been to limit the ability of the financial system to cope with stress and has put in place rules that have the potential to make the financial system more risky.
Consider the following. First, the cornerstone of the federal bailout package is the purchasing of "toxic" assets from the financial institutions. In order to improve their balance sheets and attract more capital, the government must overpay for those assets. If they were purchased at market value, then the worth of the institution is unchanged. They would remain capital impaired and would either have to raise capital in a down market or go out of business. If the government overpays, then it encourages more risk-taking by the institutions who know that the upside to the downside risk is that they will be bailed out. In finance this is called "moral hazard."
Second, the government is injecting $250 billion of preferred stock into selected banks, whether they want it or not, with $125 billion going into the largest nine institutions. With the injection comes restrictions on CEO pay. As the noted compensation expert Frank Glassner has pointed out, such restrictions will result in the most able managers leaving for private equity firms or firms without such constraints. This means that some of our most important institutions will be managed by less competent executives.
More risk and less competence is not a good combination.
Third, the bailout bill raised deposit insurance coverage to $250,000. Research in finance shows that deposit insurance encourages managers to take more risk. Institutions no longer have an incentive to limit risk for fear that depositors will withdraw their money. This is another example of moral hazard. What is truly dangerous is the current proposal in Congress to remove deposit insurance ceilings all together. This would increase moral hazard and would lead to a drain from mutual funds while increasing the risk-taking of insured firms.
Lastly, the government's purchase of assets is simply a bad idea. There is a better solution. The Fed has been lending funds to liquidity-strapped banks at the discount window since 1913. It lends the money at the discount rate while holding the bank's assets as collateral. When the loan is repaid, the bank gets back its collateral. Here, the Treasury could have loaned institutions funds at the discount rate with their toxic assets held as collateral. When the loan is repaid, the institutions get their assets back. This would be far less expensive to the taxpayer than the current program and eliminate the moral hazard problem.
Today in class I told my students that one way to restore consumer confidence in the banking system was to have the Fed stop injecting liquidity into the system. This is because ultimately it was counterproductive because such actions would lead to inflation. I then pointed to the steepness in the yield curve as an example of growing inflationary expectations. Rather, I suggested that the Fed do the opposite and raise the reserve requirement to 100 percent. This would assure depositors that their money was safe, stop inflation in its tracks, restore confidence in the financial system and raise the value of the dollar worldwide. What is there not to like?
This is not a new idea. Irving Fisher in his 1936 book "100 Percent Money" makes these same points. The Canadian blogger Paul McKeever has an excellent blog on the matter as well (go to blog.paulmckeever.ca). 100 percent reserves would mean that banks could not create money as they do now through fractional reserving. Since as Milton Friedman often noted, inflation is always a monetary phenomena, without increases in the rate of growth of money there is no inflation. The question arises as to how banks would make money under 100 percent reserving. First, the Fed could pay interest on reserves. This is something that the Fed has tried to do for years but the Congress has not allowed it. Second, the banks could borrow money and lend it out. This is exactly what nondepositories such as finance companies and mortgages bankers do. Third, the banks could lend out deposits dollar for dollar at attractive interest rates to those who agree not to withdraw their money for a certain period of time, say one year (see McKeever on this point). Early withdrawals would be subject to severe penalties that would eat into the principal and return depositors less than their original deposit.
When I was in graduate school Milton Friedman was touting the idea of 100 percent reserves. However, he realized that it had absolutely no chance of being enacted. It probably still has no chance of enactment. But Friedman once said that it took about 50 years for such radical ideas to find traction. It has been only 40 years since I heard him make it the suggestion so there are 10 years to go. So maybe if enough of us support it, who knows what could happen.
This is from Frank Glassner of Compensation Design Group. Enjoy!
IMAGINE IF NBA BASKETBALL PLAYERS WERE PAID LIKE HIGH PERFORMING EXECUTIVES…. PAY FOR PERFORMANCE!!
NBA teams are making the final push for the playoffs in hopes of playing for the championship. Many of these teams have made enormous financial sacrifice by relying on a few select players to lead them to glory, and paying them millions of dollars in guaranteed pay.
Are these so called “warriors of the courts” worth the outrageously absurd amounts they are paid?
Frank Glassner, a nationally recognized authority on executive pay and CEO of Compensation Design Group (CDG), decided to see if the actual game statistics of NBA superstars contributed to their multi-million dollar pay packages. A sports player’s statistics reflects their accomplishments on the job. Likewise, in any well run company executive compensation should depend on how well both a company and its executives perform. Either way shareholders and sports fans want to see one thing – PAY FOR PERFORMANCE!
The NBA salary cap has increased from $26.9 million 10 years ago to a new level of $55.63 million, the highest amount since the cap was established in 1984. This doesn’t even take into consideration amounts each player receives from endorsement contracts. “The current salary structure of the NBA has become bloated and obscene,” said Glassner. “Exorbitant sports salaries and mind-bending compensation packages have become synonymous with ‘pay for ego’ vs. ‘pay for performance.”
“Some NBA players are paid like some CEOs who’ve run companies aground, and still scored handsome exit packages – leaving scores of fans, shareholders and employees disappointed” said Glassner, a 32-year executive pay consulting veteran. “They are paid for lackluster performance, and deliver what they are provided incentives for”. An ideal compensation plan for players would be one based on the same principles and procedures used for successful businesses - a plan based heavily on the core of Compensation Design Group’s “pay-for-performance” incentive plan programs.
In Glassner’s plan, players would receive a base salary determined by number of years with the NBA, plus incentives based on points (adjusted by field goal percentage, “FG%”), assists, steals, and blocks per game. Additionally, there would be bonus payments for post-season play, for achieving top league status in various statistics – and behaving themselves as well.
The following outlines Glassner’s Pay-for Performance plan for the NBA:
Base Salaries: Per Game Incentives:
Rookie $200,000$2500 per point
2nd Year $300,000 $1500 per assist
3rd Year $400,000 $1500 per steal
4th Year $500,000 $1000 per rebound
5th Year $600,000 $600 per steal
6th Year $700,000
7th Year $800,000
8th Year $900,000
9 + Years $1,000,000
In order to avoid potential for “gaming” the points category, points related incentives would be adjusted based on field goal percentage (FG%).
FG% Per Game
Points Adjustment
≥ 60%
200%
55-60%
175%
50-55%
150%
45-50%
125%
40-45%
100%
35-40%
80%
30-35%
60%
25-30%
40%
20-25%
20%
≤ 20%
10%
For example, if player A scores 20 points in a game with a field goal percentage is 0.235; his total income from points scored is $10,000.
20 x $2500 x 20% = $10,000
In contrast, if player B scores the same number of points in a game but his field goal percentage is .461; his income would be $62,500.
20 x $2500 x 125% = $62,500
In the summer of 2005, the Cleveland Cavaliers signed 29 year old Larry Hughes to a 5 year, $60 million deal. Hughes was expected to be the sidekick of young superstar LeBron James, but he has been injury prone and his productivity has decreased each year since joining Cleveland. Hughes is set to make $12 million this season, and his salary will increase to nearly $14 million in 2009-2010.
Assuming that he plays in each of the remaining games this season, for every minute he is on the court, Larry will bring in approximately $6375. Additionally, if we take into consideration that Larry practices 4 hours per business working day, then he would still earn about $236 per minute. Imagine if you made $6375 for every minute you worked. In just one day, that’s 60 minutes x 8 hours x $6,375 = $3,060,184.In reverse, the median household income for 2006 was $48,201. Break that down and the average American made about $0.38 a minute.
Applying Glassner’s plan to Hughes’ performance so far, he would have earned $1,686,500 - a far cry from the current situation.Up to this point in the season, Hughes played in 21 games scoring 192 points with a field goal percentage of 33.8%, 57 rebounds, 49 assists, 34 steals, and 5 blocks:
Compensation
Performance
Total Pay
Base Salary
11th Year in NBA
$1,000,000
$2500 for each point
192 points
$513,500(1)
$1500 for each assist
47 assists
$70,500
$1500 for each steal
31 steals
$46,500
$1000 for each rebound
53 rebounds
$53,000
$600 for each block
5 blocks
$3,000
Total:
$1,686,500
(1) Field goal percentage incentive calculated for each game and totaled.
Assuming Hughes maintains this productivity and plays in every game for the remainder of the season, his total earnings for the year would be about $3,225,000. This is considerably lower than his $12,000,000 salary.
“Under this plan, if players performed at their maximum, they could actually earn their current mega salaries,” said Glassner. “The incentive to perform at their optimum would be simple: better performance, more money.”
In contrast, let’s apply Glassner’s plan to teammate LeBron James, one of the NBA’s most exciting and productive players (at the moment), who has a comparable salary to Hughes. At this point in the season, James is averaging over 3 times as many points as assists as Hughes, and more than twice as many rebounds. Through the team’s first 31 games, James would have earned $4,036,600 under Glassner’s performance based plan, which would be about $9,725,000 for the entire year at the current performance levels.
Compensation
Performance
Total Pay
Base Salary
5th Year in NBA
$600,000
$2500 for each point
848 points
$2,792,500(1)
$1500 for each assist
222 assists
$333,000
$1500 for each steal
55 steals
$82,500
$1000 for each rebound
210 rebounds
$210,000
$600 for each block
31 blocks
$18,600
Total:
$4,036,600
(1)Field goal percentage incentive calculated for each game and totaled.
It is evident how much basketball players are overpaid, even high performers like LeBron James. In fact, under Glassner’s plan, Wilt Chamberlain’s legendary 1961-1962 season, where he averaged over 50 points and 25 rebounds per game, would earn him around $18 million in today’s dollars. This pay would rank him behind 11 players for the 2007-2008 season, some of which have never had a 50 point or 25 rebound game in their careers.
Realizing these figures only represent individual production, players are also eligible for year-end awards. The tables on the following page outline incentives that players can also cash out on if they perform – and behave themselves as well.
Year-End Awards:
Year-End Team Based Incentives
Per Player
NBA Championship
$1 million
NBA Runner-Up
$500,000
Division Winner
$250,000
Playoff Participant
$50,000
Year-End Individual Incentives
Most Valuable Player
$1 million
Rookie of the Year
$250,000
Defensive Player of the Year
$500,000
Sixth Man Award
$300,000
Most Improved Player
$100,000
Sportsmanship Award
$200,000
J.Walter Kennedy Citizenship Award
$150,000
With white-hot scrutiny on executive pay, why not apply the same concept to professional athletes?” said Glassner. “Especially now, with sports pay that has skyrocketed at an alarmingly high rate – with more and more players performing like Apollo 13.”
Unfortunately, in the end, the fans, especially the kids, are the ones who lose if the current guaranteed pay system continues. “If sports teams dared to adopt true pay-for- performance pay plans, they could actually improve the game,” said Glassner. “Players, like great executives, become more motivated to improve skills and set great examples that are reflective of their pay. Owners certainly wouldn't complain about rewarding performance, and the real winners would be the fans. They would get to see an improved game with all players trying their hardest, no matter where their team is in the standings – just like the old days”.
Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com
Irving Fisher
