Can (and Should) We Regulate Executive Pay?

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2 Responses

  1. A.J. Sutter says:

    I don’t see how disclosure could be “a step in the right direction,” based on what you say in the preceding paragraphs. If the institutions don’t care, and if companies don’t respond well to shaming, then what’s accomplished by disclosure?

    Information and transparency are of most use to the investing class, whereas economic downturns, past, present and future, affect a much broader section of the population. “Transparency” in this context seems to have become a politically-correct version of “trickle-down” thinking. As for disclosures about risk management practices, the issues in the recent downturn went beyond risk, to uncertainty. An excessive orientation toward risk was a contributing factor to the crisis.

    A suggestion that’s only partly puckish: how about a regulation that limits the ratio between the compensation of the least-paid and the best-paid employee of a firm? Then if boards wanted to give bigger pay packages (sc., in an absolute sense) to CEOs, they would have to share the wealth. Or would all of our top management talent threaten to move overseas as a result?

  2. Michelle Harner says:

    A.J.:

    Thank you for the comment; I think you raise some interesting points, and I appreciate the opportunity to discuss them further.

    I do not necessarily link disclosure to shaming. Although disclosure certainly can foster change under a shaming theory, I also think is can facilitate change—even if such change is slow—by impacting investor preferences and the firm’s bottom line. As I discuss in the context of risk management (see http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1489586), showing a link between the desired conduct and profitability most likely will influence corporate boards exactly because of the American corporate culture. And I understand why you might characterize my use of transparency as trickle down economics, but I actually intended it in a different sense. I see value in transparency because it is a tool that parties can use to make better-informed decisions, not only about investing in a firm but also about lending to a firm, doing business with a firm, regulating a firm, etc. Admittedly, people may not take advantage of, or appropriately use that tool, but I am in favor of making it available.

    It is along those lines that I favor corporate boards adopting and being more involved in enterprise risk management. I completely agree with you that multiple factors contributed to the economic crisis, and I do not think that better risk management would have averted the crisis. I do, however, believe that boards could have responded quicker and perhaps avoided some of the extraordinary losses with a better understanding of their firms’ risk appetite, risk exposure and the interrelation of firm and market risks.

    And thank you for responding to my call for alternative thoughts on aligning executive compensation. Although not exactly what you propose, I would note that Congress implemented a similar restriction on executive bonuses in chapter 11 bankruptcy cases, see 11 U.S.C. 503(c).