Two Kinds Of Executive Compensation Reform - 15 June 2009

Conor Clarke

Richard Posner writes:

There
are two distinct compensation issues arising from the current economic
crisis. One involves the compensation of executives of firms that are
owned or controlled by the federal government, such as General Motors,
American International Group, Fannie Mae, and Freddie Mac, as a result
of federal bailouts in the form of equity investments rather than
loans. The other issue involves recipients of federal bailout money
that nevertheless remain under private ownership and control.

This
distinction makes perfect sense to me, but it doesn't seem like the big
one. The big distinction seems like it's between compensation as it
relates to systemic risk, and compensation as it relates to populist
anger.  

The latter category includes all the firms that
received help from the federal government -- firms that will fall under
the whip (or at least the suggestion) of special master for
compensation Kenneth Feinberg. (Everyone is using "pay czar," but
"special master for compensation" -- his actual title! -- seems like
the more intrinsically enjoyable term.) Seven of these firms (those in
which the government has an equity stake) will have their compensation
set by Feinberg's fiat, and the rest (about 80 firms) will receive
advisory guidelines from his office. But the trick with all of
Feinberg's work seems to be balancing the fear of populist pitchforks
against the fear of spooking firms out of participating in the
administration's Public Private Investment Program.

On the
other hand, the concerns about systemic risk are much broader -- which
is why Geithner proposed general corporate governance reform to deal
with them. But they should

http://correspondents.theatlantic.com/conor_clarke/2009/06/two_kinds_of_executive_compensation.php