Executive compensation is in the news...again

File under "Who Would Have Thought?" -- "Executives Cash In, Regardless of Performance" (from the Washington Post). The crux of the matter:

At many other corporations untouched by scandal, pay continues to climb whether performance is great, lousy or middling.

Now executive compensation is a thorny issue. Conservatives (and many economists) argue that those high compensation packages are set in a competitive marketplace so we should assume from the get-go that they are efficient, and that without the high salaries, the stock options, the extravagant pensions and the golden parachutes companies would find it impossible to attract economic-value-increasing quality execs. And the people who make this argument have a point. Particularly in the face of opposition from liberals and populists, who don't have much of an economic argument, no matter how compelling their moral case may or may not be.

Into the fray step Lucian Bebchuk and Jesse Fried with their recent book Pay Without Performance. (Bebchuk has been hammering away at this issue for a while, and is even quoted in the above-linked WaPost article.) This is an interesting book because it so convincingly explains why the traditional economic models of executive compensation are deeply flawed. In short, the old ways of modeling compensation negotiations have downplayed the significance of personal ties between boards and executives, and have not accounted for non-economic motivations that might drive the participants in the negotiations.

Still, no matter how correct Bebchuk and Fried may be about the models, the glaring real-world question is, What are we going to do about it? And perhaps this is a problem without a solution. Unfortunately, corporate boards are the units best suited to making compensation decisions. Even if they do it terribly, they do it better than anyone else would. Meanwhile, we have no way of even guessing what compensation packages would look like in some mythical more-perfect corporate universe.

So let me propose the Cranky Economist's Might As Well Be Principle: Executive compensation, like so many other facts of economic life, is not efficient. But it might as well be -- no one will be able to do it more efficiently, so we will never have any way of measuring (by comparison) precisely how inefficient the current system is. Pro-business conservatives should win this argument, but they shouldn't be happy about it. At the end of the day we're still stuck with a system that will continue to reward execs who drive their companies into the ground.