It’s rare that discussions of our research don’t touch on how executive compensation can distort strategic decision making.  As we report in “Billion-Dollar Lessons,” our research turned up numerous examples where compensation schemes exacerbated risk taking.  Dealmakers and investment bankers, for example, are rewarded based on the deals they close rather than long-term performance, so many fell prey to an IBG YBG attitude (I’ll be gone; you’ll be gone). Too many used easy financing to do deals that could not withstand the test of time.  Executives, loaded up with stock options that had tremendous upside for success but little downside for failure, pushed forward on huge investments that had little chance of success.  So, you might expect we’d support efforts to limit executive compensation, such as the administration’s recent appointment of an “executive pay czar” to oversee companies receiving federal bailout money.

But we don’t.

In part, our concern is that the administration’s actions relative to GM, AIG, and others on federal life support feel more like punishing the survivors than addressing the root causes of those firms’ failures.  Putting in place a czar might also have the unintended consequence of hampering the revival of firms’ fortunes, thus lowering the prospect of recouping taxpayers’ investment.  For an astute analysis of the problems with a czar, we recommend this recent posting by Richard Posner.

More generally, we’re pessimistic about whether broad regulatory intervention would save companies from making the kinds of avoidable mistakes that lead so many companies to their doom.  Tinkering with the pay of a few executives would only begin to address the myriad of issues at the heart of the bad decisions.  Boards of directors and managers need to, instead, address the issue of culture and how to build an enduring company, as we wrote about here.