Word: pay
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When I run this example by Lucian Bebchuk, a Harvard Law School professor who has supplied much of the intellectual firepower for the current pay-regulation campaign, he has a ready retort. "When they run out of good, substantive arguments, they come to the argument of unintended consequences," he says of pay-regulation opponents. "We have seen the consequences of the lack of intervention in the last 10 years. We have lived with that experiment...
Fair enough. Certainly, at the government-supported firms where Feinberg will determine pay, the case for intervention is open and shut. They're taxpayer-supported entities, after all. Feinberg does face tough decisions, such as what to do about Andrew J. Hall, head of the moneymaking Phibro energy-trading unit of money-hemorrhaging Citigroup, whose performance-based contract could net him about $100 million this year. One can extrapolate from Feinberg's past performance, though, that the veteran mediator will come up with a decent compromise - that is, one that leaves everyone unhappy...
...case for limiting pay at corporations not on government life support rests on two main arguments, Bebchuk says. Top executives are supposed to answer to shareholders, but to a large extent they have been able to determine their own pay packages. Say-on-pay votes and other measures that empower shareholders and outside directors are meant to shift that balance of power. At banks, meanwhile, pay is simply one more risk factor that regulators should keep an eye on. "Once you accept that government is already regulating the business decisions of banks, I don't know why this particular business...
Would this intervention be flawlessly executed? Of course not. But if ham-handed pay rules drive risky, highly rewarded activities out of big banks and into smaller firms - if big banks become boring again - that might not be all bad, since smaller firms presumably pose less risk to the financial system...
...long as we're talking about ham-handed measures, we might also want to consider the most ham-handed pay regulation of all - progressive income taxes. It cannot be entirely coincidental that the great explosion in executive and Wall Street pay began about the same time that Washington was slashing taxes on the highest earners. The top federal marginal rate plummeted from 70% in 1980 to 28% in 1988. (It's now 35%.) Some CEOs who are critical of the compensation status quo but who don't want government telling them how to pay people point to taxes...