Friday, March 09, 2007

Dick Armey on Executive Compensation

Writing in the Washington Times today, Dick Armey cautions his former colleagues against more legislation about executive compensation. Best paragraph:

There is a healthy dose of arrogance in the idea that another law could beat an entrepreneurial marketplace for determining how to evaluate compensation. Poor executive performance shows up quickly on the bottom line. Heaped on top is the misplaced notion that since Congress is engaged in politics and government all organizations should have the same objectives and structures. Governments exercise force and create rules. By contrast, firms create wealth and create the opportunity for people to exercise their freedom to choose, to contract, to buy and to sell.

Compensation of top-level executives is a matter to be resolved between the executives and the board of directors. Boards may not do a good job in some cases, but I don't see how greater government involvement will improve outcomes systematically.

4 comments:

Anonymous said...

The issue isn't whether the government should regulate executive pay but rather whether the owners of the corporation, the shareholders, have a right to regulate the compensation of their hired help. If boards functioned ideally and represented the shareholder's interest, this wouldn't be a problem. But boards are generally chosen by the CEO, and are often current or past CEOs themselves, and tend in such matters to follow executives' interests rather than shareholders. Why shouldn't shareholders have the right to set broad guidelines for executive comp? Why shouldn't they have the right to make errors [and not just CEOs and boards] and let the market discover them? Since there is a good deal of evidence that compensation and performance are very weakly related, my guess is that it won't turn out too badly for the shareholders.

eightnine2718281828mu5 said...

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Boards may not do a good job in some cases, but I don't see how greater government involvement will improve outcomes systematically.
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"Bank security systems may not do a good job in some cases, but I don't see how greater government involvement will improve outcomes systematically."

-Willie Sutton

Funky Disposition said...

Anonymous@ 6:34 said

"Why shouldn't shareholders have the right to set broad guidelines for executive comp?"

They do have that right, and they exercise it every time they purchase a company (or NOT purchase a company).

eightnine2718281828mu5 said...

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They do have that right, and they exercise it every time they purchase a company (or NOT purchase a company).
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Let me get this straight; if I don't buy a co's shares, you're saying that this a protest of the CEO's compensation.

Since the number of people in the world who *don't* own any particular company's shares vastly outnumber those that *do*, this is a powerful indictment of CEO compensation.

Correct?