A lengthy business section article in the Washington Post noted the failure of past efforts to restrict executive compensation. It then implied that it is inherently impossible to effectively restrict executive compensation. An important piece of evidence (not mentioned in the article) suggesting otherwise is that companies outside of the United States seem to have no difficulty attracting highly qualified executives even though their pay is generally an order of magnitude lower than in the United States. This fact suggests that the problem is unique to the institutions of the United States, rather than anything that is intrinsic to the market for top executives. While it is possible that efforts to limit executive compensation failed because it is intrinsically difficult to limit executive compensation, it is also possible that these efforts failed because the politicians who designed them did not really want to crack down on executive compensation. While high CEO pay packages are very unpopular politically, top executives are important sources of campaign contributions and political support for politicians. Therefore, it would be very reasonable for politicians to design measures that have no actual impact on executive compensation, even though this is their stated purpose. This strategy is especially attractive if the media don't point out that the measures will be ineffective, so that the public is unaware of the charade. This is exactly what happened with the restrictions on executive compensation that were put into the recent bank bailout bill. As is now widely acknowledged, the restrictions on executive pay will likely have no impact whatsoever. While some economists did point this out before the bill passed, this fact received almost no attention in the media. If Congress actually wanted to limit executive pay, there are some simple methods to do it. For example, it could require that the pay packages for the five highest paid executives be subject to a binding vote by shareholders at regular intervals, in an election where ballots that are not returned are not counted. By changing the rules of corporate governance in a way that gives more power to shareholders, Congress can make it far more difficult for top executives to pillage the companies they work for. In the context of the current bailouts, Congress could make demands that executives have pay parity with their foreign competitors, just as President Bush just demanded of the auto workers. It is actually very easy to find effective ways to limit executive compensation. The problem is simply one of political will. The Post is badly misleading its readers with this article that implies otherwise.
--Dean Baker
