21 April 2009

Artificial controls of "compensation"

[warning: this post engages in a little cynicism and sarcasm]

Geithner and co. are trying to figure out ways to match long-term performance and compensation (article here) :
Geithner in his testimony also offered new details on the government’s plans for rules on executive pay for firms that have received taxpayer aid.

The administration plans in coming weeks to release guidelines on compensation limits. The new regulations will be effective immediately, while there also will be a 60-day comment period.

“We will engage in a thorough review of this issue,” Geithner said. “I anticipate that we will look for ways to orient compensation towards long-term performance.” (my emphasis)

I had this really novel idea: when a company goes bankrupt, the executives stop getting compensation. So, an executive/company that looks to the long-term (such as Wells-Fargo who didn't buy many get-rich quick toxic assets) doesn't go bankrupt and companies that engage in shady, short-term practices go bankrupt when the cows come home and times get difficult. So, executives that looked to long-term performance still have a company AND increasing opportunites to do business as short-termers go under. This plan very effectively matches compensation with long-term performance.

The only problem with this idea is that you sort of have to let companies go bankrupt for it to work.

I'm sure Geithner and co. can find a better way through piles of well thought-out regulation that will have no unintended consequences--the kind of ironclad regulation that even the personal lawyers of high-paid executives won't be able to find loopholes in.

1 comment:

  1. But don't you see, when the government bails out companies unfit to survive the economy of the day, those companies need help. That's why they need a bail out, because they've got problems. Well, who better to provide that help than the government? So really, saving failing companies that are due for failure gives the government a platform from which they can get public support to increase regulation of the private sector. In this way government officials can transform our economy from a real and free market where executives simply make good decisions because of the real incentives of surviving in a free market to an economy controlled and directed by lawmakers. Take away the consequences (with bailouts), take away the free market consequences, why then of course you've got to make some suffocating regulations and red tape. It would be far too easy to let the market choose what companies live and which ones go.