A Couple of Thoughts On Executive Pay


Dave is a part-time blogger that writes about whatever suits him at the time.

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9 Responses

  1. Chris Dierkes says:


    I agree with this. I’ve never been able to figure out. Are the people that dumb that pols have to use this simplified populist nonsense and reduce a complex story to the least causative part? Or do the pols just think we are all idiots? Or both?Report

  2. Dave says:

    Simplified populist nonsense seems to work really well. Look at what was going on with AIG. Of course, the rich irony in the AIG situation was that the government did approve the payout of those bonuses. The torches and pitchforks shouldn’t have been heading towards Lower Manhattan but Washington, D.C.

    As a sidenote, the person I had in mind when writing this short post wasn’t idiot politicians but bloggers and pundits who tend to have a bit of a fix on this subject. Two people that come to mind are Paul Krugman and publius at ObWi but I’m sure there are others as well.Report

  3. Tyler says:

    I’m intrigued by this and Ritholtz post and will get his book.

    That said, to me, the question is – in the absence of punishment or fear of punishment what is the incentive for greedy fatcats to reform board governance? Months after taking public money they handed out more bonuses. That says to me that there is a structural problem that requires structural solutions. I don’t necessarily disagree with what you are saying here, but I am wondering what you think would work better? I’m not so sure you can’t do what you suggest here AND go after this bonus issue. I don’t think its an either/or.Report

  4. Dave says:


    Good points. I think the main problem has been the sort of corporate governance where the major institutional shareholders (be it pension funds, 401k’s or other funds) have essentially played a very “hands off” role with boards (with the exception perhaps of hedge funds using activist techniques as a corporate turnaround strategy). Boards have no incentive so long as “crony capitalism” works in their favor. All the regulation in the world is not going to do anything if shareholders (meaning those with the clout to act – institutional investors) wake up, smell the coffee and start taking their ownership positions seriously. They are doing a disservice to the people they are meant to serve.
    I think the firms that took bailout money pose a different set of questions and attempts to regulate pay at those firms are understandable and probably for the most part acceptable given the taxpayer liability. I can’t say it thrills me, but I don’t think I have a strong argument to the contrary, especially since I believe that the bailout money should have wiped out or diluted the existing equity base.Report

    • Tyler in reply to Dave says:

      “All the regulation in the world is not going to do anything if shareholders (meaning those with the clout to act – institutional investors) wake up, smell the coffee and start taking their ownership positions seriously. ”

      Shouldn’t that be the goal of the regulation. If they won’t do it and it is a business practice that has serious economic repercussions, isn’t it the obligation of government to curb it? And maybe this is targeted to financial institutions that are the grease that keeps the wheels of the economy rollin smoothly.

      For the sake of argument?

      Would regulating excessive bonusing be any different than outlawing other financial practices that take advantage of people?Report

    • Kyle in reply to Dave says:

      So Dave, you’re saying that we need a culture change amongst institutional investors that regulations/laws won’t necessarily change.

      Would you point to the high degree of deference amongst the nation’s financial elite (ala Madoff) as the largest road block there?Report

      • Dave in reply to Kyle says:


        Yes, I would certainly lean in that direction although, to give credit to EngineerScotty, it could be easier said than done given the incentive structures that fund managers themselves are subject to. If asset management fees are based upon the value of the portfolio at a given time, there is still the real potential of emphasizing stock valuations in the short term. Compound that with the possiblity of fund withdrawls if the fund performance declines and there’s no easy balancing act.

        Madoff is an interesting story and one I’ll touch on when I answer Tyler’s question in an upcoming post. There are two interesting things about Madoff. First, I see it as a textbook case of the consequences of regulatory capture and a complete failure of a regulatory body (the SEC). I think that goes to your point. Furthermore, the list of investors who did not get burned by Madoff is as interesting as those who did. I say this because not a single major institutional investor that I can think of (and I can think of plenty) were investing with him (the list, I believe, was high net worth individuals, some local (maybe regional) endowments, Jewish organizations/charities, etc.). Madoff pitched to institutional investors but, as I understand it, they were turned off by the lack of transparency.

        Prior to my current gig, I worked for an investment bank and that firm would not do any business with him. He raised all sorts of red flags with the business selection/conflicts clearance processes.Report

  5. EngineerScotty says:

    Many corporations have governance structures (staggered boards, etc) explicitly designed to reduce the risk of a hostile takeover–essentially, protecting management from shareholders. In some cases, this may be good public policy, as issues like “corporate raiders” and greenmailers are discouraged by this. OTOH, it seems that the prime beneficiaries of insulating management from shareholder pressure aren’t employees or customers or the community at large–but management themselves. With apologies to Marx, a “management theory of value” appears to have sprung up in US corporate governance, even though nobody would teach such foolishness at business school.
    WRT mutual funds, many fund managers choose to diversify–a good investment strategy, of course; but one which reduces their influence on any particular corporation whose shares are held by the fund. A fund with a 5% stake can get management’s attention, and might even get a seat on the board; but one with a 0.5% stake is often ignored.
    And even then–how many fund managers take their fiduciary duties to investors seriously? The manager gets paid regardless of how well the fund performs; and likely is in the same social circles as the directors and executives he is supposed to exercise oversight on.
    The US has developed a whole lot of expertise over the years in dealing with corruption in elected officials. Many of the problems in corporate governance are analogous.Report

  6. Kyle says:


    Fantastic post.

    I often feel as though the shroud of feel good/knee-jerk/envy-based populism obscures reason and rational thought. Apparently not.Report