Is there any research claiming that giant executive bonuses, in this case seemingly at the expense of the company they govern, is optimal for some macroeconomic quality that benefits the society at large? Or do we allow this behavior because we believe it is immoral to prevent giant executive bonuses as a matter of principle?
There is evidence in both directions, but the data isn't great, because one of the reasons that boards offer large bonuses is to attract 'talent' to troubled or stagnant companies (which don't look great on the resume). Jim Collins (author of "Good to Great") has made the case that other factors are much more important.
The other thing to keep in mind is that the 'huge' bonuses usually aren't very large from an income statement point of view; if you bought an extra 0.5% growth (or savings), it was easily worth it.
As to why this is allowed, I think it's seen as a private transaction between well-informed and consenting parties, so there needs to be a compelling reason for legislation and regulation.
It is, however, very difficult to prove that it was the executive who actually got you that extra growth, since there's no control group and many variables. Executives will claim victory for any profits and blame outside factors for any losses, making it impossible to really know if a different candidate for half the salary would have done just as well.
I've heard an economist suggest that instead of tying executive bonuses to the company's own performance, they instead compare it to the performance of other, similar firms.
Still a fuzzy measure, but it would at least give them better incentives.
> As to why this is allowed, I think it's seen as a private transaction between well-informed and consenting parties, so there needs to be a compelling reason for legislation and regulation.
I mean, it's not allowed. Part of what we're talking about here is that companies are getting around laws against retention bonuses during bankruptcy by granting those bonuses a week before filing the bankruptcy papers. Society has clearly decided that we don't think this behavior should be legal, but it's hard to close all the loopholes.
Pay is not set by value created, it's set to outbid other companies to retain, and at a time when many executive jobs are about to go, I'd suggest the bidding is far from fierce.
This is the board voting the board gets a pay rise.
> As to why this is allowed, I think it's seen as a private transaction between well-informed and consenting parties, so there needs to be a compelling reason for legislation and regulation.
In this specific case (zone of bankruptcy) there are externalities so it’s not a purely private transaction. For that matter limited liability always creates the possibility of an externality and so creates a hook for government regulation.
Employees are already treated as unsecured creditors in the bankruptcy process (unless you're the UAW), and I think lawmakers are reluctant to meddle with employment contracts in a situation which is already quite complicated.
The bonus money paid to executives is not available to the bankrupt estate and therefore to innocent third parties. They arguably should be subject to clawback.
Should all incentive pay be treated similarly? What about commissions for salespeople? Should payments to consultants also be 'clawed back', perhaps depending on what kind of consulting they were doing, and whether it was related to the bankruptcy?
I think this would quickly get complicated and have many unanticipated results; you might have situations where key employees start leaving when they think the company is going down, thereby causing a complete failure.
"The other thing to keep in mind is that the 'huge' bonuses usually aren't very large from an income statement point of view; if you bought an extra 0.5% growth (or savings), it was easily worth it."
It's hard to prove a counterfactual, but it's only worth it if said person is the only person who could achieve those results.
If you are saying that the State should tell companies how to spend their money on internal management... then you don't really believe in private property at all.
These people are spending their own money to turn the company around. Who the F is the State to tell them they are doing it wrong? Who the F are you to tell them to spend their own money differently?
