The NYT begins a lengthy piece discussing efforts to design executive compensation packages for the bankrupt institutions bailed out by the government by contrasting the "equity approach" arguing high pay with the "free-market view" that the executives should get whatever they can. While those who advocate high pay for top executives undoubtedly like to call this a "free-market" view, this is an inaccurate description. The government establishes rules for corporate governance. These rules are very detailed in terms of the treatment of minority shareholders, disclosure of holdings and relevant financial information and on a number of other topics. These government established rules, not the free market, allow top executives to largely determine their own salaries. It is politically advantageous to top executives to imply that their pay was determined by the free market, but this is not true. The article also implies that the top executives at AIG are uniquely talented and possess the skills needed to maximize the value of the institution. There is no reason to believe this to be true. The people who selected the top executives at AIG picked people who bankrupted the company and ran up an amount of debt that has no precedent in the history of the United States. There is no obvious reason to believe that the other employees chosen by the top managers are AIG are more skilled than the ones who wrecked the company.
--Dean Baker
