Thursday, February 12, 2009

Barney Frank's bad question

My earliest recollection of Barney Frank is circa 1979. He was, I think, a Massachusetts state legislator at the time and had a cameo role in the Harvard Law School student musical which, as I recall, was entitled "Supraman." I can't recall the context but his one line was something like "don't be talking down to the working man." (The other thing I recall from the show was my Property professor saving Supraman from kryptonite because nothing had penetrated him for 30 years.)

Barney has, however, been talking down to people for 30 years. One of his more ridiculous moments came this week in the bankers' Walk of Shame being conducted in Congress.

"What would you do differently if you didn't get a bonus?"

The rationale behind the question is apparently Frank's belief that "[t]his notion that you need some special incentive to do the right thing troubles me."

I have some problems with the bonus structure in the financial industry. In the company that I came from, bonuses were structured in a way that the company had to do well for the bonus to be paid and it made little sense to game one year because that would increase the bonus target for the next year. At the same time, senior managers were given a deferred compensation plan that was tied to the company's long term success.

But Frank's inability to understand incentives is startling. Management of a complicated enterprise is extraordinarily difficult and not simply a function of doing some well defined "right thing." Businesses understand that giving people a stake in the enterprise's outcome motivates them to reach beyond merely doing the "right thing" and to find ways to do accomplish things that, at first look, seem unlikely.

Of course, it doesn't always work and there is a well known problem of "short termism" (my colleague Nadelle Grossman has some emerging work on this). Wall Street bonuses seem to have been poorly structured to avoid the later problem. But Frank's question, championed by TPM and local blogger Keith Schmitz, reflects ignorance and not insight.

Supraman would have been disappointed.

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