Tuesday, April 28, 2009

Posner Critique of Executive Compensation

No less a luminary in the law and economics world than Judge Richard Posner has weighed in, sort of, on the debate on executive compensation. He does so in a procedural ruling on an obscure case involving mutual fund fees, so one might not draw too many definitive conclusions about his views. Nonetheless a close reading of the ruling reveals some distinct opinions about whether CEOs earn too much, and more importantly the source of that problem.

The actual case involves some mutual fund customers who sued the fund manager alleging that the manager charges excessive fees. In the procedural matter Judge Posner urges consideration of their case by the full Appellate Court, as “growing indications [that] executive compensation in large publicly traded firms is often excessive because of the feeble incentives of boards of directors to police compensation.” He deals out opprobrium generously: “Directors are often CEOs of other companies and naturally think that CEOs should be well paid. And often they are picked by the CEO. Compensation consulting firms, which provide cover for generous compensation packages voted by boards of directors, have a conflict of interest because they are paid not only for their compensation advice but for other services to the firm – services for which they are hired by the officers whose compensation they advised on.”

Posted by Michael Levin. Michael is with Hedge Fund Solutions and is a regular contributor to this blog. Contact Michael at mlevin@hedgerelations.com.