Another interesting read in the Journal last week, “Risk vs. Executive Reward” by Cari Tuna and Joann S. Lublin. The reporters explore two recently released, conflicting reports on executive pay’s relationship to risk-taking and what role this relationship played in the financial crisis.

Naturally the question going forward is this: should executive pay be curtailed to encourage less risky behavior (that we all have to bail out later if it doesn’t work)? Or would capping executive pay only stifle innovation – and slow our economic recovery, just when we need our top talent to zoom us ahead? Will it enable foreign corporations not hindered by such constraints to steal America’s best and brightest achievers? What do YOU think?

[image: Day 177 by Okko Pyykkö on flickr]
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The problems that caused the last several years of accelerating problems were not due to executive excess, but rather lack of enforcement of the rules of law already on the books. Capitalism is the best kind of economy you can have when the checks and balances are enforced. When they are not you have Madoffs, bailouts, mortgage crisis, etc that poke their way to the surface.

Granted, I am in no way condoning executive abuses, but in comparison to the total of various bailouts, they really are a drop in the bucket. Government control over free enterprise is sometimes necessary, but usually regular enforcement of the laws we already have by the departments we already have 'should' be enough.

The underlying flaw in your question is the part " (that we all have to bail out later if it doesn’t work)?" We dont have to bail them out. If they are left alone, and they know the risk is on them and them alone, it will self regulate the risks they take. The problem lies with the assumption that we will bail them out if they get in trouble.

My view any way...

I've thought about this quite a bit.

idid said: The underlying flaw in your question is the part " (that we all have to bail out later if it doesn’t work)?" We dont have to bail them out. If they are left alone, and they know the risk is on them and them alone, it will self regulate the risks they take. The problem lies with the assumption that we will bail them out if they get in trouble.

My view any way...

 I'm curious...are you familiar with what would have happened if AIG, Citi, BAC and the banking system had they been allowed to fail?

   I am a Capitalist, not a Socialist. I know why I am such. The problem with true socialism (or communism) is that there is no incentive to excel. However, the problem with unfettered capitalism is that greed can cause the system to collapse.

   The reason I preferr capitalism is the cure for both flaws. With socialism (or communism) the answer is forced labor, and restricted civil liberties. I find this solution abhorrent. With capitalism, the answer is restrictions on business. Specifically, child labor laws, slavory laws, minimun wage laws, etc. You see where I'm going with this.  I find the solution to unfettered capitalism prefferal to that for Socialism or communism. As I have said I know WHY I am a capitalist.

   Back on topic. The recent events have taught us something, at least I hope they have. In my opinion, too big to fail means too big to exist. What should happen is that no single entity should be able to take down the entire world economic system if they fail. As draconian as this sounds to some, this is what we now have. When some entity (AIG, C, BAC) gets to the point that they can hold the entire world hostage, they need to be broken up. This is, In my opinion, as serious as the restrictions against monopolies.

  Anyhow, this is my rage against the machine,

~~Weird Uncle Jesse~~

PS I'm drunk.

Executive pay, as always, ought to be linked to level of responsibility.
It is the responsibility of the board to approve or disapprove all decisions, including the risky ones.
It is the responsibility of shareholders to elect good board members.

Any fault, therefore, lies with shareholders. They create the pressure, and they elect the board.

One thing that seems partially broken to me, is the candidate list for board members. Usually, the shareholders have a very difficult time affecting that list. I don't have a ready solution, but there needs to be an easy way for the shareholders to place candidates for the board on the ballot.

There is always going to be failure.  If I have 80% win rate trading and 20% loss that is acceptable, at least to me.

CEO's boards, and managers need the ability to risk, just as we  do in our trading.  Its the loss rate that counts.

Big Dog remember when NEW COKE came out in the 80's and how it failed?  Here you had a great company that made a bad business decision.  They risked and they lost.  Warren Buffet didn't see it that way with Berkshire Hathaway.  He saw a tremendous opportunity because he knew the management at Coke was sound.  Yes Coke lost huge but they had sound management and came back

Shareholders, boards need to be looking at the win vs unsound business decisions and not rewarding bad behavior to executives that have failed consistently.  (I do agree there needs to be oversight though especially on the financial industry as there are key industries than can blow up the entire economy.  Seems too much greed in that industry)

On the other hand if an CEO or Executive  has grown the company  2 or 3 times and has added to the workforce and increased earnings; I have no problem seeing that executive getting paid more. 

The important thing to remember is that private industry can do it 10 times better than government ever can and that is what we need to encourage rather than regulate. 

CEO's  and boards  still need to risk, thats what capitalism is all about.

Lots to think about (and agree with) here. WUJ, you talk a lot of sense for a drunk guy; your logic must be really blazing when you're sober!

Whether or not we could've let these big guys fail versus bailing them out is, of course, the 64-gazillion-dollar question (or whatever the TARP budget is up to these days). I found incubus' suggestion intriguing: to incentivize CEOs on a more long-term basis, so that they THINK long-term about the choices they make in managing their businesses. There does seem to be a tragic flaw in quarter-to-quarter evaluations, although I suppose the chief counter-argument is that MORE frequent reporting, not less, may be the way to increase transparency. Perhaps a hybrid of long- and short-term results is what's called for?

Either way, it's inarguable now that these huge companies and their CEOs didn't consider how their risks would contribute to the larger systematic risks that are now coming home to roost - for everyone. And that's really got to change.