The 80Th Anniversary Of The Great Crash Of 1929: Law, Markets, And The Role Of The State
BALANCE
By Professor Harry G. Hutchison, George Mason University School of Law on October 29, 2009 - Comments(0)
- In the current financial climate, which is replete with myriad discussions about the efficacy of bailouts and necessity of saving institutions that are too big to fail, many commentators and lots of politicians have expressed concern about the financial compensation paid to executives of under-performing firms. Lost in much of the discussion is a sense of balance. Balance has been lost with respect to three things: (1) a sense of proportion about executive compensation; (2) the failure to offer a sustainable metric for measuring appropriate levels of compensation and (3) the unintended consequences of government efforts to rein in pay.
- First, the level of compensation since 1980 has tracked market capitalization. As shareholders have become richer, executives have seen their pay rise. Since 1980 market capitalization and shareholder wealth has risen six-fold. During the same period executive compensation also rose six-fold. In addition, executive compensation reached its peak during the Clinton Administration and fell by about a third during the Bush administration.
- Second, it is difficult to see a principled metric for executive compensation arising from the rubble of the often over-heated rhetoric that distorts America's collective understanding of compensation. This can be seen in the outrage over the bonuses received by executives of AIG, a company that received roughly 180 billion dollars from the taxpayers. Lost in the rhetoric was any discussion of the role played by Treasury Secretary Geithner and the Obama Administration. This failure was understandable because the government did not have and apparently still does not have a principled basis for examining the pay structure at large firms. Thus, it was understandable that the President signed a Stimulus bill that included, at Secretary Geithner insistence, a provision protecting AIG's bonuses.
- Third, the unintended consequences of government intervention can be seen in the on-going efforts of Mr. Greenberg, the deposed Chairman of AIG to create a competitor to AIG that is largely staffed with former AIG executives who have decided the leave the firm because they fail to see the merit in Pay Czar's attempt to limit their compensation. If Mr. Greenberg is successful, it is likely that AIG will fail leaving the American taxpayers to foot the bill for 180 billion dollars, while they stew in their own resentment at executive compensation. It is doubtful, that resentment, however justified advances the interest of either the government or its people.
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