Sunday, February 08, 2009

Why excessive executive compensation is a social issue

An article in MSN Money highlights why excessive executive compensation is a social issue that all people should be concerned about:

Now the populist shoe is on the other foot, though, and it's the liberals' turn to hail the wisdom of the crowd. Maybe, in its fury at the millions doled out to bankers who drove their institutions into the ground, the public understands something about moral hazard that the Treasury Department doesn't. Maybe, in its rage for fairness, the public is on to something that the banking industry's remaining defenders need to acknowledge.

It is merely this: Wall Street's compensation system isn't just aesthetically displeasing to liberal snobs. It is the very heart of the problem. According to Bill Black, a professor of economics and law at the University of Missouri-Kansas City and an authority on dysfunctional financial systems, "It is the compensation system that has proved to be the weak point in everything critical that went wrong, that has produced a global catastrophe."

At each stage of the disaster, Black said -- loan officers, real-estate appraisers, accountants, bond ratings agencies -- it was pay-for-performance systems that "sent them wrong."

The need for new compensation rules is most urgent at failed banks. This is not merely because it would make for good PR but because lavish executive bonuses sometimes create an incentive to hide losses, to take crazy risks and even, according to Black, to "loot the place through seemingly normal corporate mechanisms." This is why, he continued, it is "essential to redesign and limit executive compensation when regulating failed or failing banks."

Our leaders may not know it yet, but this showdown between rival populisms is, in fact, a battle over political legitimacy. Is Wall Street the rightful master of our economic fate? Or should we choose a broader form of sovereignty?

Let the conservatives' hosannas turn to sneers. The market god has failed.

No comments: