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By the time you read this our Congress will probably have rammed some version or another of Treasury Secretary Paulson’s Great Bank Bail-Out Scheme (now being peddled as the “Economic Rescue Plan”) down our collective throat and there’s a good chance that our economy’s ragged ass has been pulled out of the fire – at least for the moment. I’m still stunned at the way Paulson (aided by Bernanke and Cox) managed to ignore the clear warning signs of the imminent financial Tsunami for close to a year and then demand that we drop everything and put him in absolute control of cleaning up the mess he helped create. Somehow this amazing piece of slight-of-hand reminds me of the scene in the movie Blazing Saddles where the newly-appointed black sheriff escapes being lynched by the townspeople by taking himself hostage.

Don't get me wrong, I'm very happy that I (probably) won't be standing in line at the local soup kitchen any time soon. It's just that I can't help but think that there would have been a better way of going about patching the hole in the economy than subsidizing the same folks that dug it in the first place. Some well-respected conservatives have questioned whether there is an imminent credit crisis at all (see Alan Reynolds' October 1, 2008 article on Forbes.com), and there have been several interesting alternatives to the Paulson give-away from both the right and the left. But since I'm just a technologist, I'll leave it to others who are more economically savvy than myself to argue their merits. What I can contribute to the debate are some suggestions based on the smaller version of this year's economic train wreck that I witnessed within the tech sector (with its epicenter somewhere just North of San José) around the turn of the century.

The Tech Implosion that nearly buried Silicon Valley (and much of the rest of the tech sector) back in 2001 was small change compared to the dung-storm that the investment banks stirred up this time but there are many common patterns to both boom/bust cycles. Although one bubble was built on silicon and the other was built on real estate, both cycles went off the rails when the industry players stopped focusing on producing anything of value and started to concentrate on inflating their company’s short-term paper value – regardless of the long-term consequences. It was amazing to watch the rise and fall of junk companies (the precursor to junk mortgages?) that were engineered from the beginning to produce an inflated stock offering or a hasty pre-IPO buy-out by Cisco or Broadcom with no intention of ever producing an actual product or technology.

Much of this corrosive behavior had to do with the bizarre compensation schemes for CEOs and top execs that actually rewarded them for stripping companies of the human and economic resources essential for their long-term survival in order to squeeze out a few quarters of high returns that would secure their performance bonuses. Meanwhile, the golden parachutes built into their contracts insulated them from any serious consequences if the fuse on the time bomb they set inside the company happened to go off prematurely. I sincerely believe that if top management knew that they actually had to face the consequences for the damage they did, there’s a good chance that both financial disasters would never have happened.

So while we may be powerless to avoid having to pay for the excesses of the folks who got us into this mess, there should certainly be a way to extract a pound of flesh from them and make it harder to pull something like this in the future. If I were king, here are a few non-market-based things I’d impose on any company looking to seek shelter under the wing of the government instead of facing the market-based consequences of their mistakes.

1. Salaries of CEO and top execs would be limited to a sane multiple of the lowest salary paid in the company (15x – 20x is common practice in Japan and many parts of Europe) with some pretty strict guidelines on perks like jets, vacation homes, etc... Any other compensation would be performance-based, calculated using a 5-year weighted average of the company’s net profits After their first year of service, an exec would receive 20% of the possible bonus, with a 20% increase each year. After their departure, the bonus would roll off at 20% a year until it hit zero (see my January 2006 Editorial Ending Executive Welfare for details). Such a scheme would tend to slow down the company-hopping practiced by most CEOs and provide a strong disincentive for the smash-and-grab tactics favored by most top management today to line their pockets.
2. While I was at it, I’d require that all employees, from the CEO down, have the same health care plan.
3. Outlaw any sort of golden parachutes and severance bonuses in excess of what the company gives to all regular salaried employees. Compensation should be for performance, not for getting your incompetent ass out of a company after you’ve screwed up.
4. Shareholder reports would have to include full financial statements from each board member and top-level manager. This would also include full disclosure of relationships with other companies. I’d also require financial statements to include detailed listing of expenditures on lobbyists, PACs, and political contributions.  All these details would be required to be accessible to the public in both print and on the web on a quarterly basis.
5. Mandatory random drug tests for all top-level management. Given what I’ve seen in Silicon Valley, I wonder how many really poor business decisions were, at least in part, pharmacologically-induced.

Comments? Questions? Invitations to sit on your company’s board of directors? Post your comments on our blog or write me at lhg at en-genius dot net.