Tuesday, October 6, 2009

Executive Pay

The Wall Street Journal reports that the government's pay czar is targeting salary cuts for firms that received aid from the government. This is not a surprise; government money usually implies government control or at least restrictions on behavior. An example is federal funds that go to universities or colleges comes tied with government regulations. A few colleges, perhaps Hinsdale College in Michigan is the best known, refuse to accept government funding.

There is also a question of the method used by the czar to limit pay. In particular, there will be a shift from salary to stock and requirements that the stocks should be held for a period of time. The goal is to reduce the incentive for taking large risks in hopes of short-term gains. But why don't the boards of directors of these firms establish such practices? They exist in many firms. Why is the government better able to sculpt the appropriate pay package than the boards? I doubt the government is better. But, we are also back in the "too-big-to-fail" problem. If a bank is too big to fail, people anticipate that there is always a government bail out in the background, and this lowers the cost of acquiring funds for the bank. It also increases the incentive to take on more risk. The optimal solution is to end too-big-to-fail, and let banks that suffer losses from taking on too much risk bear the consequences.

Finally, to learn more about executive compensation, go to the web site of the Center on Executive Compensation. They offer information and research about ways to arrange executive compensation so that it rewards longer-term profitability.

1 comment:

  1. Thanks for the link to the Center. I look forward to doing some digging there.