Cuban has it wrong on Outsourcing

Mark Cuban, the owner of the Dallas Mavericks and one of the founders of Broadcast.com which was sold to Yahoo! for Billions, maintains a GREAT blog over at Blog Maverick. Mark writes on everything from sports to the future of digital entertainment. This week he wrote a piece that centered around outsourcing, expensing stock options, prescription drugs, and social security. While this list of topics sounds more appropriate for a campaign stop than for commentary by a basketball owner, Mark is really an incredibly bright guy whose opinion on any topic is often thought provoking and important.

Having said that, Mark is flat out wrong in his comments about outsourcing. The premise of Mark's argument, which can be found here, is that he doesn't have a problem with outsourcing in general, he has a problem with how the money saved by companies is distributed. He says that the majority of cost savings associated with outsourcing are then kicked back to executives in forms of bonuses, stock options, etc. His solution is that insiders should not be able to sell stock or get corporate bonuses in any year they outsource jobs.

Let me break down his argument component by component. First, yes, executives that outsource are often paid more in bonuses and rewarded with stock options. This compensation is based on the fact that the companies which outsource are more likely hitting their corporate goals which execs are measured on, and therefore they get rewarded appropriately. The notion that there is a conspiracy to send jobs overseas to line execs pockets is crazy... execs are motivated by hitting the goals they are measured on and therefore will do what it takes to raise revenue and lower costs. If they do this they should rewarded as long as it is in the best interest of the company over the long term.

His solution to this "problem" is that execs shouldn't sell stock or get bonuses in years they outsource. This is a terrible idea. The solution Mark proposes will directly create a conflict between corporate goals and personal goals for execs. An exec might be able to save $1 Million a year by outsourcing some component of work, but he will think twice if his child is headed to college and needs to cash out some stock to pay the bills. Now the exec needs to decide between what is right for the company and what is right for him personally. We need to do more to align the incentives of execs and the firms they run, not create obvious misalignments.