Two Kinds Of Executive Compensation Reform


550 geithner wikimedia commons.png

Richard Posner writes:

There are two distinct compensation issues arising from the current economic crisis. One involves the compensation of executives of firms that are owned or controlled by the federal government, such as General Motors, American International Group, Fannie Mae, and Freddie Mac, as a result of federal bailouts in the form of equity investments rather than loans. The other issue involves recipients of federal bailout money that nevertheless remain under private ownership and control.

This distinction makes perfect sense to me, but it doesn't seem like the big one. The big distinction seems like it's between compensation as it relates to systemic risk, and compensation as it relates to populist anger.  

The latter category includes all the firms that received help from the federal government -- firms that will fall under the whip (or at least the suggestion) of special master for compensation Kenneth Feinberg. (Everyone is using "pay czar," but "special master for compensation" -- his actual title! -- seems like the more intrinsically enjoyable term.) Seven of these firms (those in which the government has an equity stake) will have their compensation set by Feinberg's fiat, and the rest (about 80 firms) will receive advisory guidelines from his office. But the trick with all of Feinberg's work seems to be balancing the fear of populist pitchforks against the fear of spooking firms out of participating in the administration's Public Private Investment Program.

On the other hand, the concerns about systemic risk are much broader -- which is why Geithner proposed general corporate governance reform to deal with them. But they should actually be less controversial. If you think industry-wide compensation structures created systemic risk, then of course it makes sense -- almost by definition -- to think about regulating them.

Does anyone think they did not create systemic risks? Even the Wall Street Journal editorial page agrees with Geithner on this, in principle. You might say that, in the grand scheme of the financial meltdown, the risks created by executive compensation weren't as big as persistently low interest rates or mass housing market hysteria. But that's not really an argument against regulation; at best it's an argument for different priorities. Isn't the real argument is over the best way to regulate?


The Misty-eyed Tim Geithner is from Wikimedia Commons.
------
(For more: James Kwak has had some good posts on this, and points to a paper from Harvard's Lucian Bebchuk -- who also testified on the Hill last week -- that makes the case for a relationship between compensation structures and systemic risks.)

Presented by

Conor Clarke is the editor, with Michael Kinsley, of Creative Capitalism. He was previously a fellow at The Atlantic and an editor at The Guardian. More

Conor Clarke is the editor, with Michael Kinsley, of Creative Capitalism, an economics blog that was recently published in book form by Simon and Schuster. He was previously a fellow at The Atlantic and an editor at The Guardian. He is also on Twitter.

How to Cook Spaghetti Squash (and Why)

Cooking for yourself is one of the surest ways to eat well. Bestselling author Mark Bittman teaches James Hamblin the recipe that everyone is Googling.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

Video

How to Cook Spaghetti Squash (and Why)

Cooking for yourself is one of the surest ways to eat well.

Video

Before Tinder, a Tree

Looking for your soulmate? Write a letter to the "Bridegroom's Oak" in Germany.

Video

The Health Benefits of Going Outside

People spend too much time indoors. One solution: ecotherapy.

Video

Where High Tech Meets the 1950s

Why did Green Bank, West Virginia, ban wireless signals? For science.

Video

Yes, Quidditch Is Real

How J.K. Rowling's magical sport spread from Hogwarts to college campuses

Video

Would You Live in a Treehouse?

A treehouse can be an ideal office space, vacation rental, and way of reconnecting with your youth.

More in Politics

Just In