CEO pay matters

There's a link between executive compensation and the financial system blowing up. CEO pay is structured so that if the company does well, they become insanely rich, and if the company blows up, they walk away with whatever money they made. So you'd think their incentive would be to run the company well and get rich. But running a compnay well is difficult, and profits aren't easy to come by, because you're also competing with a bunch of other guys who are trying to get rich.

So instead of doing the hard thing -- running the company well -- you can take lots of risks, get lucky for a couple of years, cash out $100 million in appreciated stock options, and walk away when the company blows up. A little creative accounting (Enron) or playing dumb and mispricing your assets (Wall St) makes this even easier. And if everybody else on Wall St. is doing it, which they were, you'd be stupid not to. That's exactly what's happened. That's why every firm on Wall St. seems so stupid. But if you were the CEO, you weren't being stupid at all. You got rich.

Brad DeLong had a post about this back in 2002: Options Make Executives Long Volatility

If shareholders and boards had any sense (and they don't), they would recognize this, and hire people who were idealistic about their company's mission and deliberately underpay them. You can find boring, competent, sober people who will settle for only $1 million/year. You might also not want to have your CEO based in NYC, where they'll feel poor if all they can only afford is a $5,000,000 apartment (boohoo).

Richard Cohen joins the reality-based community

Richard Cohen, September 18, 2007: "After Petraeus Is Slimed, Spineless Silence"

Whatever the case, using "betray" -- a word associated with treason -- recalls the ugly McCarthy era, when for too many Republicans dissent corresponded with disloyalty. MoveOn.org and the late senator from Wisconsin share a certain fondness for the low blow.

Richard Cohen, September 17, 2008: "The Ugly New McCain"

McCain has soiled all that. His opportunistic and irresponsible choice of Sarah Palin as his political heir -- the person in whose hands he would leave the country -- is a form of personal treason, a betrayal of all he once stood for. Palin, no matter what her other attributes, is shockingly unprepared to become president. McCain knows that. He means to win, which is all right; he means to win at all costs, which is not.