Government Should Regulate Executive Pay

Last Updated Aug 4, 2009 3:55 PM EDT

Harvard economist and law professor Lucian Bebchuk weighs in with an op-ed supporting executive compensation controls now under consideration by Congress.

This question is too important to be left up to companies themselves, he writes in the Financial Times.

"Regulation of pay in financial institutions is justified by the very same moral hazard concerns that provide the basis for existing regulation of the sector. Because the failure of such companies imposes costs on taxpayers that shareholders do not internalize, shareholders' interests are served by more risk-taking than is socially desirable. For this reason, financial institutions have long been constrained by a substantial body of rules that restrict private choices with respect to loans, investments and capital reserves."
Read Bebchuk's arguments at Regulate Financial Pay to Reduce Risk-taking.

The U.S. isn't alone among world governments addressing this issue. Turns out many countries are considering similar measures in the belief that excessive compensation packages, which favored short-term performance, led to the excessive risk taking seen as a contributing factor to the econ crisis.

My BNET colleague Steve Tobak just wrote an opposing view. Read Government Say on Executive Pay? No Way
What do you think? Do boards and shareholders have enough incentives and tools in place to control the pay of their chief executives without the heavy hand of government? Take our poll.

  • Sean Silverthorne

    Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

    Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.