On Executive Compensation

As noted in the Wall Street Journal, “The U.S. Treasury and the Federal Reserve unveiled Thursday a set of curbs and rules for executive compensation at banks, marking a watershed moment for government intervention in the private sector.” As one might expect, the right is spinning the pay curbs as an assault on free markets and capitalism, and the left as a long overdue step to end the looting of corporate America by CEO’s in collusion with the Boards of Directors who decide their compensation.

Wikipedia has a pretty good summary of how the system currently works, and a more detailed, albeit somewhat dated, scholarly paper on the subject may be found here. I tend to lean to the left on this one, and am more or less in agreement with Mark Green’s take at Huffpo. In short, I suspect the claim that CEO compensation decisions are comparable to those for other highly paid individuals such as the top tier in major league sports, movie stars, pop singers, etc., is poppycock. I have little faith in the integrity of the system, and suspect that, in effect; CEO’s are not only cutting the cake, but are deciding who will get the first piece. I do not agree that such legitimized thievery is an essential aspect of free market capitalism.

According to the arguments on the right, summarized, for example, here and here, the Administration’s attempt to regulate executive pay won’t work. We are told that the services of these highly talented individuals are in great demand, and, if we refuse to cross their palms with silver, they’ll simply jump ship and move to more lucrative posts, or, according to a rather more fanciful argument, will start successful new private businesses of their own. To all this I can only say, I doubt it. I suspect people are standing in line to take these jobs, and that many of those in the line are not only more capable than the current incumbents, but are also willing to work for a much more reasonable level of compensation. Who is right? We are in the process of conducting an experiment to find out.

The right has made some very specific predictions about what will happen if the Administration follows through on its policies. I propose that we carefully monitor the future careers of the executives affected by the cuts. If they actually do “go Galt,” and no comparable talents can be found to replace them, I will cheerfully eat crow. If, on the other hand, it turns out that the services of these individuals were not really as critical or as indispensible as advertised, and the dire degradations in the performance of management at the affected firms predicted by the right fail to materialize, then perhaps they might consider adjusting their paradigm of what constitutes “free market capitalism” accordingly.

Author: Helian

I am Doug Drake, and I live in Maryland, not far from Washington, DC. I am a graduate of West Point, and I hold a Ph.D. in nuclear engineering from the University of Wisconsin. My blog reflects my enduring fascination with human nature and human morality.

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