Getting What We Paid For…

My latest post is up on the Sun-Sentinel site. I haven’t written much publicly about the financial crisis lately because I’m saving most of the material for my forthcoming book, which is taking most of my time (hence the light posting here). Because compensation has received some heavy — and, as I argue, inaccurate — press lately, I felt compelled to make this little-understood argument clear. I make the point that there is a compensation problem, but it’s not the one you think. Find out what the real compensation problem is here. And now for my addenda:  

  • Probably the best article in the press about the compensation debate — as it is being considered by most people, not the problem I highlight — is here. It gives a little bit more depth than I went into.
  • Lucian Bebchuk has been a very clear-headed expert during the crisis. I encourage you to read his plea for compensation regulation here.
  • René Stulz is an outstanding — and in my opinion, underrated — financial economist. Awhile back, he made a sensible defense of derivatives against, dare I say, fear-mongers like Nassim Nicholas Taleb. (Taleb is correct on many points, but I think he takes it a bit too far on this issue.) Not only is Stulz a good researcher, but as an editor and administrator, he is responsible for a very important and long overdue shift in the profession. From Justin Fox’s The Myth of the Rational Market:

The Swiss-born, MIT-trained Stulz was no peddler of unconventional ideas in his own work, but his dozen years in charge of the Journal of Finance were marked by a dramatically more open editorial policy than under his predecessors. No longer did it take the special intervention of Fischer Black to get a paper that mentioned psychology or questioned market efficiency into the pages of the discipline’s flagship journal.

To a senior professor voting on whether to give a young colleague tenure, an article in the Journal of Finance was an article in the Journal of Finance, even if one disagreed with it. “He’s the big hero,” said [Harvard economist Andrei] Shleifer of Stulz. “He’s the person who brought this field out of the forest. He just said, ‘This is fine; we’ll publish these papers,’ and other journals began to follow his lead.'”

  • I hope that little snippet also tempted you to buy Fox’s book. If you have any interest in finance or economics, it is a must-read. Buy it here.
  • If you’re curious what research I was referring to with the “Great Man Theory” of CEO compensation, Princeton economist Uwe Reinhardt gives the theory an excellent treatment here and here. Cornell economist Robert H. Frank dissents here, but this is one of those rare times when I strongly question Frank’s argument. Two reasons: (1) He doesn’t give much evidence of the link between compensation and performance, which Reinhardt does (and finds it rather nonexistent). (2) He doesn’t give the matter his usual evolutionary touch. If he did, I think he’d find that organizations too often select leaders for reasons that are economically irrational and dangerous but were more useful in a primitive, tribal setting.
  • The Michael Lewis quote is from his legendary Liar’s Poker. Lewis is one of the best nonfiction writers of our era, and Liar’s Poker is his masterpiece. It’s short. Read it. Now.

As always, a final reminder to read my original post.