Thursday, November 05, 2009

The Virtues of Limiting Executive Pay

Bruce Yandle:

We taxpayer/investors demand a set of risk-sensitive compensation guidelines that will mandate pay and wealth-management rules for all federal government top executives starting with the president of the United States and all cabinet members and their deputies. While we’re at it let’s include all members of Congress and every member of the commissions and boards that manage the nation’s independent agencies, including, of course, the board of governors and chairman of the Federal Reserve System.

To properly align incentives of these elected and appointed executives (and others), we demand that each and every one be paid a base pay — some 75 percent of the current salary — plus incentive pay — the remaining 25 percent — based on improvements in real GDP growth over a five-year period that begins the day of their appointment or election. The base pay would be provided on the normal Office of Personnel Management pay schedule. The incentive pay, with recommended details worked out by Feinberg, would be provided on the basis of a three-year rolling average gain in real GDP, which means that the first incentive payment would be received three years after an executive’s first day of office.

But this deals with just part of the incentive misalignment. We must align incentives associated with government executive wealth.

Elected and appointed government executives routinely place their personal investment portfolios into management by a blind trust. While this action satisfies those who may be concerned primarily with ethics and upright behavior, simply being blindfolded as to capital gains and losses does not get to the systemic risk problem, which of course, is our chief concern here.

All high government officials described earlier must have their personal portfolios invested in a visible S&P 500 index funds, not to be redeemed until one year after leaving office. We taxpayer/investors do not want our executives blindfolded as to gains and losses. We want them to know exactly what is happening to the Great American Bread Machine, our economy, while they are in office. We want them to feel our pain and our gain.

Feinberg and Bernanke should focus efforts on those whose actions can capsize the economy—the top executives and elected officials in Washington. The others are small potatoes.

Russ Roberts thinks he's on to something. I have to agree.


Billy Oblivion said...

Instead of one year post-office holding, pay it out over x years where you get 1/x at the end of the first year, 2/x at the end of the second etc.

Force them to think long term.

thinking said...

I agree with Billy...these type of ideas only work if the rewards are distributed over a longer term and thus based on longer term economic performance.

Otherwise, public officials would have incentive to goose the economy with more of these financial bubbles and cash in quickly...similar to the incentives in the private sector that led to reckless behavior creating the most recent bubbles.

Of course I doubt if such a plan for govt officials would work anyway. These people do not have their govt job for the money per se. They almost all could make more money in the private sector, and many enter public service already wealthy. Plus, the real financial rewards are what they can get once out of public office.

I think some public officials have their jobs because they really do view it as a means of service. Some go into the public sector out of more selfish motivation: the power, the perks, and the earnings power after they leave.

Either way, they already have incentive to keep the economy strong, since their job security often depends upon that.

So this is a creative and interesting idea, but of course would not work.