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Tuesday, August 18, 2009

Is executive pay out of control?

Posted By on Tue, Aug 18, 2009 at 12:42 PM

The U.S. Supreme Court may answer that question for us when they hear a case involving mutual fund investors and the directors who are paid to watch over and direct those funds. The problem? Most mutual fund investors aren't aware of how much the directors are being paid -- and, it's often a lot.

On one side, expect free market arguments like this: Investors can fire their advisers at any time. Countered by this: Most investors pay more attention to the fund's past performance than the fees and can't be relied on to buy or sell at optimal times because they're not as tuned into the market as, say, an analyst, financial adviser or mutual fund director.

It can also be argued that the government has no right to protect consumers from themselves, that they should be paying more attention and it's their own fault if they make a mistake. In turn, in our busy world, it's well known people don't read contracts or policies and aren't always sure of what they're signing or buying into, that they're relying on guidance from trusted advisers who might be trying to take advantage of them.

Last summer, Richard A. Posner, a federal appeals court judge, issued a surprising and prescient dissent. Executive pay is out of control, he said, and the marketplace cannot be trusted to rein it in.

Judge Posner is a conservative with libertarian leanings, and he is a leader of the law and economics movement associated with the University of Chicago. He often relies on economic analysis in his judicial decisions, and he believes that many questions are best sorted out by the marketplace.

But corporate America has insulated pay decisions from market discipline, Judge Posner wrote. “Executive compensation in large publicly traded firms often is excessive,” he added, “because of the feeble incentives of boards of directors to police compensation.”

The Supreme Court will hear the case this fall, as anger over huge bonuses paid to the executives of failing companies continues to grow. The case, Jones v. Harris Associates, may turn out to be the court’s first significant statement on the corporate culture that helped lead to the Great Recession.

More from The New York Times.

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