Academic

Do The Exec Comp Restrictions in the TARP Prove That Exec Comp Matters?

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

Lucian Bebchuk is no lonely iconoclast in corporate law scholarship, but I think it is fair to say that he thinks that executive compensation is a surpassingly important issue of corporate governance, while many finance professors disagree.  For example, you won't find too many economists putting the blame for the financial crisis on the compensation structures of the banks, under the theory that they encouraged short-termism and nickels-before-steamrollers business strategies (not too many, mind - I'm not saying that there is none of this).

One thing that the financial crisis has suggested, however, is that banks will go to great lengths to avoid limitations on compensation, a trend that reached its amazing culmination when Bank of America, far from being awash in liquidity, paid back Treasury its $45 billion extremely quickly.

In my view, the experience illustrates how executive compensation rules can serve as a tool for bank regulation - and perhaps an easier tool to deploy than some of the usual safety and soundness measures.  Worried about Too Big To Fail?  Permit banks to get as big as they want, but impose compensation limitations on banks that go over a certain size threshold.  Want to discourage a form of lending?  You could impose a one time only compensation tax on employees trading on bubbles.

Which is not to say that this is regulation the government should be doing.  But if it wants to discourage certain forms of behavior, I think the way is pretty clear.

And I think it suggests that Bebchuk may be on to something in positing the centrality of compensation for corporate performance.

Full post as published by Conglomerate on December 11, 2009 (boomark / email).