21 March 2009


The outrage over the AIG executive bonuses is really over the top, amounting to mere millions while the government is spending trillions of dollars haphazardly. It is not that these bonuses are defensible, but rather that far more in questionable bonuses have been paid at other firms, and the percolating opposition may spill over to all bonuses generally. This would be disastrous, insofar as employees from secretaries to CEOs depend on receiving them as part of their compensation. In financial firms bonuses are a given, and are designed to reward and encourage good performance. Certainly some companies have paid out excessive sums at the top, but that is a problem for the owners of the company, i.e.the stockholders, whose money is being spent in this fashion, not the government. This is also another ominous indication of what happens when government takes ownership of private institutions and begins to micromanage them. However posturing politicians in the congress and administration are in no position to pass judgement in this or any other similar situation because they share a complementary feature that pervades all forms of organization.

The primary truth of every organization is that the people in charge run it in their own interests. This is as true for corporations as it is for nonprofits, "community" groups, political parties, churches, schools, universities, socialist regimes, unions, government agencies, associations, and every other form of human organization. Once the cornerstone of bureaucracy is laid, structural differentiation begins to take place, as people assume functionally specific roles. This means that someone must be in charge and manage different layers and the overall direction of things. In the process human nature kicks in and those in charge make certain that the activities of the organization complement their own interests. This does not mean there is an inherent conflict here, and the consequences can be beneficial. Nevertheless there is a certainty that those in charge will be sure that their own needs, comfort, and prerogatives are met and born by the organization to the extent possible. Supervision, no matter what the structure, is at best tenuous, as no one outside can manage the day to day operations of a hierarchy. The perquisites of office are widely accepted as legitimate for the roles in question and from this a sense of entitlement often follows, and as a result personal interest becomes fused with organizational purpose. Thus, organization inevitably results in oligarchy as those in charge enjoy not only the greatest benefits, but have the ability to strongly influence, if not control, their distribution. The power to make such decisions and implement them comes with oligarchy. Consider virtually any organization and you will find the trappings of office accentuated at the top.

Under normal circumstances no one questions the legitimacy of these arrangements as long as things function more or less as expected. It is when systems break down that a crisis ensues, and that is essentially what we are facing now in the global financial industry. Prior to this time an executive could walk off with tens, if not hundreds of millions of dollars with the expectation of little more than envy. Thus for example, a Michael EIsner could earn more money in one year than Walt Disney earned in his entire life while founding and establishing his corporation. Now that the disconnect between performance and reward is evident, more and more anger has been directed at financial organizations and other corporations. The reaction to AIG is simply the explosion of pent-up frustration. However, keep in mind that no matter what succeeds AIG, sooner or later the inevitability of oligarchy will establish itself.

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