In the past generation or two, social scientists have often spoken of unintended consequences, notably the unintended consequences of well intentioned regulation. The trouble is that those with a familiarity with human nature and human history often were able to predict such consequences. Recent efforts to cap CEO pay fit into that formula.
Here’s an interesting reflection from today’s Wall Street Journal about what the effoft to cap CEO pay will probably do:
For starters, the limits seem to apply only to "senior executives" -- the chief executive, chief financial officer and the like -- and not to many of the people who can earn the really big bucks on Wall Street, like traders, hedge-fund managers and the mad scientists who cooked up all those derivatives that almost destroyed the world financial system. Leaving the compensation of these hot shots intact, while reducing the pay of the people who are supposed to boss them around, isn’t going to make the investing world any safer.
Outsourcing is another way to get around a pay cap. In 2003 and 2004, managers at Harvard University’s giant endowment came under withering fire from the ivory tower for earning upward of $35 million apiece. They soon left to start their own firms, which were promptly hired by the endowment and got paid a percentage of assets under management rather than a cash salary and bonus. That new form of payment stopped the criticism cold -- even though it isn’t likely the managers earned any less. . . .
Finally, the new rules from the Treasury Department permit Wall Street’s "senior executives" to get incentive pay in the form of preferred stock that can’t be cashed in until the taxpayers get their money back. But there s no rule yet against cashing all of it in at that point -- what compensation experts call cliff-vesting.
Thus, managers may be tempted to take greater risks in hopes of speeding up their preferred-stock payoff. If the risks go bad, Uncle Sam will eat the losses. "It’s the classic trader’s option," says George Wilbanks, a managing director at executive recruiter Russell Reynolds Associates: "Heads I win, tails you lose." He adds, "That’s my biggest fear: that people are going to swing for the fences to get to the cliff-vest faster."
Some of the history behind the study of unintended consequences in our day has to do with modern social scientists slowly learning that not all human problems have solutions. That conclusion cuts against many of the reigning myths of the field.