The financial reform legislation tackles the question of executive compensation in a strange way. The perception is that poor compensation practices have led to mismanaged incentives and to the expropriation of profits by employees, and that both of these factors have diminished the returns to investors, lowering returns on investment and misallocating scarce national resources. Financial regulation has taken this on by requiring a “say on pay” – a shareholder vote on executive compensation. But this vote is advisory only! It cannot overrule a decision by the board or, even stranger the company! (See pages 868+ here) I wonder if my employer would accept my paying myself what I wanted (or what the chair of my department approved), instead of what they wanted to pay me? If we have a shareholder vote – that is if we have asked the actual owners of the company what they think the executives should be paid — why in the world not make this vote binding? Why don’t the owners run the show?!
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