I mentioned the other day that -- gasp! -- the free market does not perfectly regulate the salaries of executives at public companies, and I pointed out the error in a conservative pundit's analogy between executive salaries and baseball player salaries: the latter are determined by arm's-length negotiation; the former may be corrupted by market failure.
Today's piece by Adam Liptak in the NYT shows that Judge Posner agrees with me. Here's an excerpt from Posner's opinion (dissenting from denial of rehearing en banc) in a case challenging executive compensation:
"[E]xecutive compensation in large publicly traded firms often is excessive because of the feeble incentives of boards of directors to police compensation. . . . 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. Competition in product and capital markets can't be counted on to solve the problem because the same structure of incentives operates on all large corporations and similar entities."
Let's remember that Judge Posner is one of the leader's of the law-and-economics movement, and that, if anyone understands when the free market can be counted on to get something right without regulation and when it can't, it's him. Moreover, his dissenting opinion got five votes in the Seventh Circuit and the Supreme Court has just granted cert in the case.
Take that, Amity Shales.
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