But… that was only supposed to hurt rich people….

An interesting passage from Clayton Cramer’s blog on what happens when the government tries to “stick it to the rich”:

There is one problem driving not just HP, but a lot of other U.S. companies to constantly slashing workers. In 1993, Democrats in Congress showed how much they hated "rich people" by passing a law that prohibited corporations from deducting as business expenses any annual salary exceeding one million dollars–and the salaries of the next four highest paid officers. So large corporations started to compensate officers with stock options instead. This created a strong incentive for officers of the corporation to keep the stock price rising for the next few quarters–even if it destroyed the long-term viability of the company. Note that this didn't actually prevent corporations from compensating their officers quite generously. And in truth, Democrats weren't really trying to prevent that–they were just pretending to be on the side of the little guys, while continuing to cozy up to corporate fat cats. It just created perverse incentives for how to run a large corporation.

A company that is developing complex products will need several years from the start of the process to the point where the product starts to bring in revenue. Think of this as a tunnel: you put money in one end of the tunnel in 2004; it turns into a return on investment in 2008. The products that you start developing in 2005, won't give a return until 2009. Ditto for 2006 to 2010, 2007 to 2011, and 2008 to 2012. If your focus, because of your stock options, is driving up the stock price over the next several quarters, the temptation to go for short-term improvements is very, very strong.

Cutting spending this year may impair profitability in 2012–or maybe it won't. It's hard to tell. But you can almost guarantee that cutting spending on long-term projects this year will drive up the stock price for the next quarter or two. This is why layoffs often lead to higher stock prices. Corporate officers whose primary income is derived from stock options have a strong incentive to cut costs right now. I don't think that stock options are necessarily a bad thing. But it does encourage a short-term view of how to run a company.

On a different note (but from the same blog): Holy Crap. How is this guy a major party nominee?

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2 Responses to “But… that was only supposed to hurt rich people….”

  1. Brian Dunbar Says:

    In other news – a report released today by MoveOn dot org, a Washington D.C. think tank, reports that if farmers cease feeding their pigs, they can save 100% of the food costs associated with a typical farm.

  2. Strider Says:

    Cool. Free beef! 🙂

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