Governance vs. envy

Posted by Marc Hodak on September 20, 2009 under Executive compensation, Reporting on pay | Read the First Comment

The current debate over how bankers should be paid is actually two conversations conflated into one.

The nominal conversation is about elevated concepts, such as corporate governance and systemic risk.  The Fed proposal is about regulating “compensation policies deemed to pose a potential threat to a financial institution’s soundness.”  In fact, the discussion of governance and risk is simply a front for the real conversation driving public policy—envy, i.e., a less elevated concern about how much other people make and who gets to decide.

Governance, as a distinct topic, is too boring for the media to write about.  On the other hand, how much other people make is quite interesting.  But raw dollars is too crude a topic for our media elite to claim as an explicit journalistic interest.  So the MSM satisfies this interest implicitly by conflating the governance and envy conversations in a kind of bait and switch.  The bait is code words like “millions” and “outrage” in the headline or lead.  Then, for the next fourteen paragraphs, they will discuss governance and risk, as if those considerations were actually driving policy makers and government leaders to the point where compensation overwhelms the agenda of the upcoming G20 talks.  Finally, in the fifteenth paragraph, they will return to the crux of what’s driving the debate:

In the U.S., the Fed’s plan will further inflame the debate between those who feel it bank pay too high [sic] and those who resent Washington’s reach into the private sector.

“Pay too high” is a concern about envy, not governance, but even here the narrative is used to disguise envy by obliquely citing ‘those who feel.’

Of course, there exist legitimate governance and risk concerns in the way people are paid.  These could be debated on their merits.  One would then see that there is little theoretical or empirical evidence that compensation policies pose a systemic threat.  Going deeper, one would realize that the owners and boards of companies already have a lot of incentives and information for regulating compensation-induced risk at their institutions.  In fact, one would see that their incentives and information are far better than those of the political actors trying to arrogate to themselves these powers.  In fact, one would see that the systemic risk that endangered these financial institutions was created by, among others, the same Fed that now magnanimously proposes to regulate systemic risk.

Alas, purely governance considerations would not get any attention in the media or, therefore, in the halls of Congress.  If we simply acknowledge that the real driver of lawmaker interest is public envy, then we could debate whether or not the sensibilities of voters should be given weight in compensation decisions.  Then we would see that the envy debate is basically about mechanisms, i.e., how to weight the input of politicians versus owners in determining who gets paid what. But then we would have to distinguish this aspect of the discussion for what it is — debating the relative merits of a market-based economy versus centrally planned economy.   The MSM elite will proudly discuss this in the context of a “progressive” agenda.  Just don’t call them socialists.