In this Article, I study a fascinating problem - what are the legal, political and economic implications of regulating executive bonuses? While the Administration's recent consideration of proposals to tax bonuses of AIG executives has sparked a great deal of media speculation and attention, there has been little legal scholarship discussing the various possible consequences of this and other methods of regulating executive compensation. Especially given the growing interest in executive compensation and the possible benefits and costs of regulation in this arena, I believe this paper will make a significant scholarly contribution to the existing literature on corporate governance and tax policy with respect to executive compensation. While the media has focused on public outrage and resulting political pressures to punish executives that took excessive risk while compensating themselves handsomely, the little legal literature on the subject has focused almost exclusively on constitutional and contractual dimensions. Economists and scholars of human capital, however, also raise issues around potential disincentive effects of such measures (for instance, would excessive controls on compensation dissuade talent from seeking such jobs?). In addition, there is an ongoing debate on whether or not there is even a relationship between executive incentive mechanisms and firm performance - while some scholars argue that performance-contingent compensation does indeed improve firm-level financial outcomes others argue just the opposite. In general, the literature on incentive effects and the pay for performance relationship has the potential to inform the current debate on taxing executive bonuses. In sum, to the best of my knowledge, there has been no attempt to integrate or synthesize the different factors - legal, political, and economic- that impact the potential costs and benefits of taxing or otherwise regulating executive bonuses and other forms of incentive compensation retroactively. I conduct a systematic review of the legal studies literature and the literature on incentive effects of executive bonuses, and consolidate them into a concise, simple framework that distinguishes ex ante controls on compensation with ex post controls, and contrasts process-oriented policy options with content-oriented ones. As I offer a concise and comprehensive account of the various factors that affect the costs and benefits of regulating executive compensation and identify unanswered issues, legal and other, I conclude that no single policy is going to act as a “silver bullet.” My critical review of each of these policy choices reveals that the problems associated with executive compensation are endemic to the flawed U.S. corporate governance structure, and thus cannot be mitigated without fundamental structural reform in that broader system.
Reforming Executive Compensation: What Do We Know and Where Do We Go?,
4 J. Bus. Entrepreneurship & L.
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