The Conscience of a Liberal by Paul Krugman

Author:Paul Krugman
Language: eng
Format: mobi, epub, pdf
ISBN: 9780393060690
Publisher: W. W. Norton & Company
Published: 2009-01-12T06:00:00+00:00

What those who watch the movie today may not realize is that the words Oliver Stone put in Gordon Gekko’s mouth were strikingly similar to what the leading theorists on executive pay were saying at the time. In 1990 Michael Jensen of the Harvard Business School and Kevin Murphy of the University of Rochester published an article in the Harvard Business Review, summarizing their already influential views on executive pay. The trouble with American business, they declared, is that “the compensation of top executives is virtually independent of performance. On average corporate America pays its most important leaders like bureaucrats. Is it any wonder then that so many CEOs act like bureaucrats rather than the value-maximizing entrepreneurs companies need to enhance their standing in world markets?” In other words, greed is good.12

Why, then, weren’t companies linking pay to performance? Because of social and political pressure:

Why don’t boards of directors link pay more closely to performance? Commentators offer many explanations, but nearly every analysis we’ve seen overlooks one powerful ingredient—the costs imposed by making executive salaries public. Government disclosure rules ensure that executive pay remains a visible and controversial topic. The benefits of disclosure are obvious; it provides safeguards against “looting” by managers in collusion with “captive” directors.

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