Executive Paycheck Curbs: Problem-Solving or Populism?

Jimmy P calls the new restrictions on executive pay at bailed-out firms a "great distraction."

If it really is just a distraction, the cynical explanation for why Washington is putting executive compensation on the front burner is that it plays well on Main Street. It's much easier to show to voters that you are doing something about the financial crisis by pinning the blame on fat-cat CEOs and their luxury jets, rather than, say, the byzantine vagaries of Federal Reserve policy.

I've recently pointed to the lack of evidence that compensation made much of a difference in determining which institutions did poorly in the crisis. Here's another interesting study out this month from the NBER. It finds a few counterintuitive results:

1. It's not salaries as much as other incentives:

...the salary of the median CEO has increased less than average wages in the non–farm sector. It turns out that most of the post–1999 increase in Current compensation is accounted for by net proceeds from trade in stock, i.e. by options exercise and stock sale.

2. Everyone talks about executive compensation in terms of the billions of dollars in income and other benefits these executives are pulling in. But as we know, nominal numbers don't tell the whole story. The authors actually looked at the incentives as, not dollar amounts, but percentage changes in wealth, and how much those percentages changed from 1993 to 2006. The idea is that percentages might more accurately measure just how much richer these CEOs are. This is what they found:

...if what really matters is percentage changes in wealth, then we are led to conclude that incentives did not change over time.

That finding raises the question: if CEO incentives played such an important role in the financial crisis, what was going on in the years 1993 to 2006?

For fairness' sake, I should point to an interesting argument in favor of executive compensation limits from Simon Johnson at TNR.