Bebchuk vs. blindingly stupid pay rules

Harvard’s Lucian Bebchuk, perhaps the leading academic critic of executive pay, has found a regulation of executive pay he didn’t like – the stimulus bill. Here’s what he says in today’s WSJ:

Mandating that at least two-thirds of an executive's total pay be decoupled from performance, as the stimulus bill does, is a step in the wrong direction. * * *

[T]he value of some banks' common shares might largely represent an "out-of-the-money option," expected to deliver value only if things considerably improve. In such circumstances, restricted stock may provide incentives for executives to take excessive risks with the bank's survival. * * *

The bill provides executives with counterproductive and unnecessary private incentives to terminate or avoid TARP funding, even when doing so would not be in the bank's best interest.* * *

Public officials should be wary of introducing new distortions and perverse incentives. With so much hanging in the balance, ensuring that those running the country's banks have the right incentives is as important as ever.

Sounds familiar. As I noted (discussing a column by Jason Zweig) with respect to the intially proposed paycaps:

paycaps let covered executives get preferred stock that they can cash in the minute taxpayers get their money back. This encourages the managers to bet the bank – heads I win (and get paid), tails you lose (bank goes bust). Sounds like the sort of perverse, short-term incentives that got us into this mess. 

See also my other criticism of the paycaps here and here.

Academics often do not seem to understand when they propose regulatory fixes that they do not control the lawmaking process. I and many others have pointed out that whatever problems there are with executive pay are best fixed by the market than by turning regulators loose amid populist angst over high-paid executives. Professor Bebchuk, at least, is now learning about the dark side of regulating governance. I fear he may have his eyes opened further over the next few years.

Comments

[MHodak]

One can only hope about the durability of Bebchuk's conversion. He's a very bright guy, and it would be nice to have him back into the skeptic's fold.

Bebchuk began as someone adamantly opposed to regulatory interference earlier in his career, until the point he found that he had more influence with the SEC and other government agents by agitating for regulation. As recently as last week, his position was that the limits on executive compensation sought by the government were "not enough."

Maybe he will realize that just because the legislators invited him to their party didn't mean they wanted a real relationship.