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
