A Couple of Thoughts On Executive Pay
Treasury Secretary Timothy Geithner said Wednesday that the Obama administration will take several new steps to reform the ways executives are paid on Wall Street — and he argued that pay packages were partly to blame for the epic Wall Street crash of 2008.
“There were clearly some areas of compensation that contributed to excessive risk taking across the financial sector,” Geithner said in a meeting with Securities and Exchange Commission Chairwoman Mary Schapiro, Federal Reserve Governor Dan Tarullo and leading executive pay experts.
First of all, I completely agree with Barry Ritholtz in that compensation is a symptom and not the problem. His brief post (including a passage from his book Bailout Nation, a book I look forward to reading – yes, shameless plug):
I find it amazing that at this late stage of the bailouts, how so few people — still — see the full picture. A perfect example of that is the focus (even obsession) on compensation. This is focusing on the symptom of an unhealthy corporate system, and not the underlying disease.
The true problem underlying the comp issue is corporate governance, and the way the Boards of Directors fail to represent the interests of shareholders. The way they systemically engage in the worst form of crony capitalism, transferring wealth from shareholders they are charged with representing to the senior management they are cronies with.
It’s time for the shareholders to step up, and when I speak of the shareholders, I speak mainly of the large instituitonal shareholders who hold the lion’s share of common stock. Why they don’t have the ability to make this happen I do not know, but if there is a reasonable place to start, corporate governance is it.
With respect to the Geithner quote, assuming that you can make the argument that certain compensation incentives that led to excessive risk taking that drove short term profits through the roof but exposing both the firms and the financial system itself to huge risks, addressing executive compensation amounts to an indirect solution. The appropriate and more direct response would be to evaluate those activities and determine what steps should be taken to regulate, limit or prohibit them. Whether or not it affects executive compensation to the extent the strongest advocates for limiting executive compensation hope for is beside the point. The bigger long-term goal should be stable and functioning capital markets. Going after executive pay for its own sake gets us no closer to that goal.