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Friday, February 09, 2007

More on Exec Comp.

Thanks to commenters on my earlier post on the opacity of executive compensation.  Before I take up some of the comments, I wanted to talk about one obvious objection to my hypothesis.  (Quick summary of the hypothesis for those who missed it & dislike clicking or scrolling: executive pay is structured to be difficult for outsiders to measure in order to reduce voter pressure for redistributive taxation). 

The objection is this: although non-cash compensation may be harder to discern for the person reading a corporate disclosure form, if the executive accurately reports the income to the IRS it will still show up in statistical summaries of U.S. taxpayers (like this one).  (Note that individual tax returns, and information from them attributable to a particular individual, are confidential under 26 USC 6103.)  So what would executives be getting out of opaqueness, assuming I've got their goal right?

I think one answer might be time.  Many forms of deferred compensation are also tax-deferred.  For example, most options won't be taxed as income until exercised.  Golden parachute payments typically won't have to be reported on tax returns until the parachute opens.  And so on.  So at a minimum, the individual executive is able to delay the day in which the public learns how much she and others like her really earned.

Again, I remain interested in any thoughts about whether this hypothesis is testable.  Next: another possibility.       

Posted by BDG on February 9, 2007 at 02:28 PM in Corporate | Permalink


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As a non-academic who practiced law at a public company and now writes a blog on corporate governance, I must respectfully suggest that this discussion over-intellectualizes the issue. Executives obfuscate their compensation for one reason only: they want to keep getting paid the big bucks. They know that, as Professor Bebchuk has pointed out, the good times can only keep rolling until some constituency - shareholders, the public, Congress - wakes up and objects. It's also been inexplicably easy for execs to obscure the picture; the fact that "tally sheets" are considered a novel idea shows there has been an implicit "don't ask, don't tell" pact between boards and management. Institutional investors know how to read proxies, but chose not to get involved until recently.

Posted by: Wendy Fried | Feb 10, 2007 9:55:45 AM

Test it by asking a sampling of executives whose comp is public how much they would reduce it so as to make it private (the market price for privacy). Here's a guess: zero, or the equivalent of zero.

The thesis, at least to anybody who has been an executive, is intuitively odd. Public backlash? C'mon. Last I saw there were very few marches on Bloomfield Hills, Scarsdale, Lake Forest, or Bel Air. Here's a better thesis for why you want your comp private: avoiding calls and spam from insurance agents, investment advisors, stockbrokers, and those people in Nigeria who have $50 million in a bank account just waiting to be shared.

Posted by: Jeff Lipshaw | Feb 10, 2007 9:25:40 AM

The most obvious objection to this theory, in my view, is that reducing public knowledge about the incomes of the wealthy would be a public good for executives as a class (indeed, for the very rich as a class). Therefore, individual executives would have little or no incentive to take it into account when negotiating their contracts. If executives are willing to hide their salaries to produce the public good (for the rich) of preventing a populist backlash against them, they should also be willing to forego taking the company private jet in order to contribute to the public good of fighting global warming.

A second objection is that public opinion polls for decades suggest that the majority of Americans don't actually care much about how much money the very wealthy earn. They do care (to some extent) about poverty and income stagnation, and living standards. But that is not the same thing as caring about inequality per se.

Posted by: Ilya Somin | Feb 9, 2007 11:34:38 PM

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