Friday, February 27, 2009

The nonsense over high wages

Earlier in the week, Jim Calhoun, head men's basketball coach for the University of Connecticut, received a question during a post-game press conference to the effect of: "Since you make the most money of all public employees in the state, and there's a state budget shortfall, do you feel you should give any of your salary back?" Calhoun's response has become well quoted-- "not a dime"-- and he proceeded to embarrass the reporter not for the question as much as the circumstances under which he asked it. Though it should be noted that he began to make the exact argument that needs to be made for the question at hand.

Well, now the Connecticut State Legislature has decided to get involved. Nothing can come of this on Calhoun's end other than keeping the issue in the news; had you told me last week about the events and asked how much I thought people would be upset, I'd have thought the public backlash would have been a bit more. It's been surprisingly a non-issue, in my opinion, anyway.

My thoughts:

- Along my theory of "legislatures should concern themselves with pointless activity, for that way they will stay clear of the economy," I'm pleased that they've decided to take up the issue.

- Calhoun began to make the proper argument to rebut the "you make too much and you should feel bad about it" argument-- namely, it's not the salary in absolutely terms that matters, but salary in light of the employee's productivity. If Calhoun makes $1.6 million yet brings in $12 million-- and those that have checked the figures find that $12 million is a fairly accurate representation of what the program brings in, perhaps a bit on the high end-- what's the problem? If you were running a company and you were in the portion of your cost and production curves such that each employee cost you about 1/8 of the value of his marginal product, then you hire more people.

- Granted, the production function for Connnecticut basketball is not that purely separable. There are other inputs besides a coach that play a role in the revenue generation process. However, Calhoun has been there for a while-- since 1986-- and any current infrastructure that leads to revenue generation can likely be attributed, if not solely, then largely to Calhoun. Therefore, it's not too much of a stretch to make the $1.6 million/$12 million direct comparison. That being said, what's his actual salary in accounting terms for the state? Couldn't you make the argument that he doesn't make anything at all-- and to that end, couldn't you also make the argument that he's the most underpaid public employee? What other Connecticut employee generates a net of $10 million for the state? That is the argument I wish he'd have continued with-- because if Calhoun proceeded correctly, he could have forced the questioning reporter to admit he was the more overpaid worker.

- Regardless of productivity, what aspect of wage contracts obligate the employee to give back parts of their salary should economic troubles ensue? Ironically, the private market has solved this just fine-- tie the salary to the performance of the company, and the most common example is a stock option plan. They weren't designed exactly for this situation, but the effects are still the same. Of course, the same people that think Calhoun should give part of his salary back are those that feel stock options aren't appropriate since they lead to-- gasp-- higher incomes. Not that stock options are viable for public employees...


Justin M Ross said...

Great Post Matt, I love the last point especially.

On a related note, I would love, love a compensation scheme for congressmen that behaved this way. Rather than providing a base salary, give them a fund that is indexed to annual GDP growth and pays continuously over time even after they leave office (and don't let them sell it).

Anonymous said...

I think Calhoun's case is more legit. The stock-option plan can suffer from the principal-agent problem. I think this is less of the case with Calhoun. His performance is much more in sync with the apparent goals of UCONN and probably the state of CT.

Anonymous said...

"Ironically, the private market has solved this just fine-- tie the salary to the performance of the company, and the most common example is a stock option plan."

No, tie salary to performance with stock, not options on stock. Otherwise you encourage gaming the system for short term rewards.