Frankly Speaking

An open letter to Congressman Barney Frank: Executive compensation should be high on your list of priorities as chairman of the House Financial Services Committee.

To: Rep. Barney Frank (D-Mass.)

Congratulations on your promotion to chairman of the House Financial Services Committee. I know it doesn’t become official until January, when the Democrats take over the House, but I’ll bet you’re already thinking about the agenda you plan to pursue.

No doubt there are many priorities competing for attention, but you’ve said you’d like to focus on executive compensation. So to help you think about this subject, let me recommend the latest installment of our three-part series on executive pay (“Pay Daze“).

I’m sure you’re smart enough to realize that the history of compensation reform is riddled with good intentions gone awry. Look at the Clinton Administration’s $1 million cap on tax-deductible pay. That spurred more interest in stock options, which, as you know, haven’t worked out so well. Or look at the call for more disclosure. A lot of people think that executive compensation really started to zoom after Michael Eisner’s take-home pay became public knowledge. The CEO Smiths have to keep up with the CEO Joneses, you know.

And I think you probably know about the thornier challenges of making pay schemes more rational. For starters, the ideal mechanism for linking executive pay to shareholder value remains to be discovered. There’s also the Lake Wobegon effect: every CEO is above-average (who, after all, would hire a below-average CEO?) and so every CEO deserves above-average pay.

Oh, and don’t forget the compensation committees. They’re still less reformed and cozier with CEOs than even above-average people appreciate.

So good luck, Congressman Frank. If the Democrats want to usher in an era of improved governance, executive compensation is a topic that can’t be overlooked.

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