Incentives for the Dictator
If Congress insists on passing something like the Paulson plan, it should have the following feature: The Secretary of the Treasury will no longer get a salary. Instead, he will be paid entirely in the form of a performance bonus. If the TARP makes a loss, he gets nothing. If it makes a profit, he gets a percentage of the profit.
posted by knzn at 9/24/2008 05:51:00 PM
3 Comments:
Interesting thought. According to recently released estimates, Paulson's current net worth is around $700 million (this might have changed after the recent market turbulence, but with independence requirements, probably not substantially).
I am not sure the loss of his $191,300 annual salary will give major incentives for Paulson to perform compared to say a substantial dent in his public image for overselling the plan.
Having stated that point, your suggestion to link pay and performance might indeed help politically sell the plan to pessimistic Main Street constituents ultimately wary of Paulson's intentions.
Suspending the salary is purely for political reasons, but the incentive pay (if it were large enough, maybe 1% of the profits) could be enough to affect his motivation. A more important purpose is just to give him the clear instruction to manage the program in such a way that the Treasury should expect to make a substantial profit. (Possibly, though, that's not what we want, if the real purpose of the program is to recapitalize banks. In the abstract, that's a reasonable goal, but I don't like the idea of doing so by the covert method of deliberately overpaying for securities.)
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