Wednesday, May 13, 2009

More Government Intervention

According to this Wall Street Journal article, the administration is considering means of controlling compensation by banks to executives. The lead-in says this:
The Obama administration has begun serious talks about how it can change compensation practices across the financial-services industry, including at companies that did not receive federal bailout money, according to people familiar with the matter.
These "evil executives" have been the target of populist ire for some time. And, to be sure, there are real issues with compensation. For example:
The initiative, which is in its early stages, is part of an ambitious and likely controversial effort to broadly address the way financial companies pay employees and executives, including an attempt to more closely align pay with long-term performance. [Emphasis added]
There is little doubt from years of economic/finance research that when compensation is based on short-term performance, you get short-term behavior. Therefore, compensating more on the basis of long-term performance should lead to more long-term behavior. But, what is the "long-term"? How you compensate a CEO who may have a useful life of 5-6 years on the basis of this "long-term performance"? Is this really the job of the government to determine compensation schemes in the first place?

But the story takes a turn for the worse:
At the same time, House Financial Services Committee Chairman Barney Frank (D., Mass.) is working on legislation that could strengthen the government's ability both to monitor compensation and to curb incentives that threaten a company's viability or pose a systemic risk to the economy.
Yes, this model of forward-thinking, ethical, and public-interest centered behavior is working on legislation that places more power in his hands. This should cause everyone to shutter just a tad.