Bailouts And Executive Compensation

Congress votes on the bailout bill today. If I get a chance to review it, I'll update this post and summarize it. (UPDATE: Never mind. The House narrowly voted down the bill on a bipartisan basis, with more Republican opposition than Democratic opposition to the Bush Administration backed compromise plan, 140 Dems for, 95 against, and 65 Rs for, 133 against. One non-voter, Jerry Weller (R-IL).)

A few related notions about shareholder rights and executive compensation in big corporations.

1. The Wall Street rule (i.e. sell stocks of bad companies, rather than holding and making proxy votes) does have a real impact on corporate behavior. While a large negative proxy vote has little impact, has major stock price collapse, as we've seen in the recent financial crisis, can have a dramatic mpact.

2. I've frequently blogged about the notion that the dollar amount of executive compensation, which often remains fairly modest relative to overall shareholder equity, is less important than the incentives it creates for executives who have a heads I win, tails you lose proposition.

There are, at least, three other concerns related to executive compensation.

One is something of a Laffer Curve/diminishing marginal utility concern. Basically, at some point, senior executives get so wealthy that their compensation becomes little more than a way to keep score in a game that doesn't matter much more than a guy's night out poker game. If their company collapses or loses value, they may lose a perk or two, but life will go on even if the executives never make another dollar.

A second concern is that the self-dealing involved in these executive compensation packages builds a culture of corruption that is bad for the integrity of large corporations generally.

Third, there are also a macroeconomic income inequality and social class concern. The CEO and senior executive pay vis-a-vis shareholder wealth fight (and I do believe that the CEO and senior executive pay issue is largely one between shareholders and senior executives), makes almost no difference to the bottom 95% of the wealth distribution who neither work as senior executives, nor have substantial stockholdings. But, there may be a notable impact on the distribution of wealth within the top 5% of the wealth distribution. My intuition is that older pensioners and pre-retirees who have accumulated financial wealth throughout their lives, are taking a modest dent in favor of a new class robber barons who invest substantial portions of their massive compensation packages, and who have disproportionate political economic and social power in our society as a result of this wealth that could be leveraged into a new aristocracy.