Mid-June saw Executive Compensation Week here in Washington. On June 11 the House Financial Services Committee convened a hearing on Compensation Structure and Systemic Risk, just one day after the administration announced that attorney Ken Feinberg (lately of the September 11th Victim Compensation Fund) would serve as the “Special Master” overseeing executive compensation at firms receiving TARP funds. His vaguely kinky title notwithstanding, early reports suggest Feinberg won’t be imposing much discipline on naughty execs. “Our people kind of thought it was a nonevent,” a bank executive told the Washington Post.
But all the attention on bonuses for executives at TARP firms obscures a much bigger issue, one touched on but never sufficiently investigated during the hearing: how to recalibrate the share of gains captured by shareholders, executives and workers in the post-crash economy.
So far, there hasn’t been much progress on that front. In fact, corporate governance expert Nell Minow says that, counterintuitively, massive future payouts for CEOs are being “spring-loaded” into the system. “They’re resetting all their benchmarks and options grants at what they know is a low point,” she says, “so that when the market comes back they are going to rise with the market, having done nothing themselves. That’s what we saw in the ’90s: up to 70 percent [of gains from stock options] are attributable to market gains as a whole, and yet executives argue it’s pay for performance.”
The focus on limiting outsize payouts isn’t simply about populist backlash or a basic sense of fairness (though those are perfectly good reasons for it). The pre-crash mushrooming of executive pay in the finance sector almost certainly helped bring about the crisis. “Incentives for short-term gains,” Treasury Secretary Tim Geithner said the day Feinberg’s appointment was announced, “overwhelmed the checks and balances meant to mitigate…the risk of excess leverage.”
Bloated CEO salaries aren’t exactly new, but why they persist is harder to explain than you might think. Every dollar paid to an executive above his or her actual worth comes from the pockets of the shareholders. And while workers may be too beaten down to fight back, investors aren’t exactly a powerless class in America. Why, then, do they allow clubby compensation committees and consultants to pick their pockets?
Part of the problem is the raw difficulty of figuring out how much value a particular CEO adds to a company. There’s also a legal structure that attenuates shareholder power. But there’s a deeper issue. CEO pay is to corporate governance what farm subsidies are to the federal government: the benefit accrues to a small group (CEOs or big agricultural concerns like Monsanto) while the cost–whether to shareholders or taxpayers–is shared widely.
It’s a “collective choice problem,” according to Minow. “The amount of time and energy that anybody spends to read through this impenetrable prose,” she says of the details of a compensation package, “is never going to be paid back by the fractional share” of the savings. Economists call it “rational apathy.”