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Academic

: Conglomerate

Executive Compensation: "Our Incoherent Hearts' Desires"

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

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Writing about the doctrine of unconscionability, Arthur Leff penned one of the great passages ever written in a law review article:

In effect, we want to have the world so arranged that everyone will be motivated to get as good a deal for himself as possible by being as informed and efficient as he can be, but that no one will have to get a bad deal in the process. But the payoff for the former necessitates, indeed entails, the latter. Hence doing both is not a technical problem ? how do you define unconscionability, how do you specify unfairness in a short statute ? but a cultural one: we cannot have perfect freedom and perfect fairness at once. What we have, instead, is ?unconscionability,? a legal device that allows us, inconsistently, and with only symbolic impact, an occasional evasive bow in the direction of our incoherent hearts? desires. Arthur Leff, Thomist Unconscionability, 4 Canadian Bus. L. J. 424 (1979).

This passage came to mind as I read Timothy Geithner's comment on the bill passed last Friday by the House of Representatives regulating executive compensation: "This is a positive step forward to increase accountability and transparency in executive compensation, and to help ensure that pay encourages long-term performance, not excessive risk-taking."

Allow me to appropriate Leff for purposes of this modern debate:

In effect, we want to have the world so arranged that every executive will be motivated to take the risks necessary to achieve long-term profitability, but that no company will have to lose money as a result of excessive risk taking. But the payoff for the former necessitates, indeed entails, the latter. Hence doing both is not a technical problem ? how do you define "pay for performance," how do you specify excessive risk taking in a short statute ? but a cultural one: we cannot have perfect profitability and perfect risk-taking at once. What we have, instead, is a crazy quilt of regulations of executive compensation that allows us, inconsistently, and with only symbolic impact, an occasional evasive bow in the direction of our incoherent hearts? desires.

UPDATE: Glom friend J.W. Verret forwarded me some interesting commentary on the bill, first from the Jim Lehrer News Hour (the relevant segment begins at the 38 min mark) and second from the Senate Banking Committee (click the large red button on upper right). Congrats to J.W. for his continued rise as a public commentator all things corporate.

Full post as published by Conglomerate on August 03, 2009 (boomark / email).