"Over-incented", now there is an interesting word for what has been going on in the economy the last 8 years.
It's used today in the NYT in an article titled "White House Philosophy Stoked Mortgage Bonfire"
Mr. Paulson said the administration, like others before it, "over-incented housing."
Gee...yah think?
More on housing, cars, consumers, and Wall Street over-incenting below.
I recommend that you take a look at the full article linked above, not that it is that great on the causes of the financial mess (Calulated Risk has some very valid criticisms of it), but because there are some priceless quotes/comments in it. I'll start with those then look more at "over-incenting".
Then his Treasury secretary, Henry M. Paulson Jr., told him that to stave off disaster, he would have to sign off on the biggest government bailout in history.
Mr. Bush, according to several people in the room, paused for a single, stunned moment to take it all in.
"How," he wondered aloud, "did we get here?"
"WOW!"
"The Bush administration took a lot of pride that homeownership had reached historic highs," Mr. Snow said in an interview. "But what we forgot in the process was that it has to be done in the context of people being able to afford their house.
Yah mean folks shouldn't buy a house if they can't afford it?
"No one wanted to stop that [housing] bubble," Mr. Lindsay said. "It would have conflicted with the president’s own policies."
Never let the facts get in the way of your ideology
"This administration made decisions that allowed the free market to operate as a barroom brawl instead of a prize fight,"..."To make the market work well, you have to have a lot of rules."
"The problem with those guys at the White House, they had all the answers and they didn’t think they had to listen to anyone, including the Treasury secretary," Mr. Oxley said in a recent interview. "They were driving the ideological train. He was in the caboose, and they were in the engine room."
There is an old saying ... "What gets measured, gets done". It's one of the first things that I learned in business school and it is dead right.
Look at the comments in the article. Bush wanted to increase homeownership rates, especially amongst minorities, so ... that's what got done, except no one thought to think of the side effects , or what "rules" had to be bent to get it to happen. What was important is that it did happen, consequences be damned.
In the mortgage industry, employees were "incented" based upon the volume of mortgage business that they wrote, (but not on the quality as the mortgage was going to be sold down the line anyway, so who cared about the quality), and guess what, they wrote lots of mortgages, for anyone that could sign their name with at least an "X".
On Wall Street, investment bankers were "incented" based on the volume and size of the deals that they cut. It didn't matter worth shit whether the deals made sense, or could ever make money. Get the deal done, get the reward was the mantra.
In corporate America the goal is to "maximize shareholder value", and executives are "incented" to make that happen. Of course to really goose "shareholder value" you need to take a few risks..and if they work, you make a lot of money. If not, oh well, there is always another place to try again.
Look at Toyota and compare it to the Big 3.
Most outsiders find Toyota unfathomable because it doesn’t bear any of the telltale signs of a successful enterprise. In fact, it resembles a failing or stagnant giant in several ways. Toyota pays relatively low dividends and hoards cash, which smacks of inefficiency. From 1995 to 2006, Toyota’s dividends averaged only 20% of earnings. For instance, its 2006 payout of 21.3% was on par with that of smaller rivals, such as Nissan’s 22.9% and Hyundai-Kia’s 17.4%, but far behind (the then) DaimlerChrysler’s 47.5%. At the same time, it had accumulated $20 billion of cash, leading some analysts to call it Toyota Bank.
and
When Toyota promotes employees, it doesn’t praise them. Instead, senior executives deliver a message along these lines: "Congratulations on your promotion. Many others were within a hair’s breadth of being selected. Keep that in mind as you do your job." This is to instill humility in employees by reminding them that their success is due in part to the efforts of equally accomplished colleagues.
Looking at Toyota as compared to GM, Ford and Chrysler these days, one does not need to think too hard about who is "incenting" correctly.
Then there is executive pay. While the "brilliant" management goofs at GM, Ford and Chrysler were getting paid a fortune...
Even before this auto sales meltdown, the Japanese automaker’s top ten execs earned less money COMBINED than Ford’s Alan Mulally, Chrysler’s Bob Nardelli and GM’s Rick Wagoner (individually)
and Toyota is looking at cutting director salaries as an example while Big 3 execs...
who sat in front of America’s duly elected representatives and refused [almost] point-blank to take a pay cut, whilst asking for a $25b federal "bridging loan."
Of course consumers can't be let off the hook either, or maybe they can. Bubbles Greenspan brought in ultra low interest rates to spur the economy (and help Bush get his increase in home ownership rates) and consumers so "incented" did their part, taking as much cash at low rates as they could, buying houses, taking equity out of their homes, buying cars...you name it. Of course they also ran up sky high and record debts and pushed house prices to unsustainable levels..but the economy was spurred, for a little while at least.
The moral of the story of course is to be careful what you are "incenting", as there will undoubtedly be side effects. And the higher the incentives being offered, the higher the willingness of those being "incented" to ignore those side effects.
It is also a caution to those that want to play with foreclosures and mortgage relief. Be careful what you may inadvertently be "incenting".
As a final thought I leave you with a story I heard from an auto company worker comparing Honda and GM. At GM, if you are late your pay is docked. At Honda if you show up on time every day for a week, you get a bonus. Show up every day on time for a month, get a bigger bonus. Show up every day on time for the year and get an even bigger bonus. Guess which company has the better attendance record?